2). Demand

• What is the purpose of a market?

  A market brings all potential buyers together to purchase a product.
• What is demand?

  Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price and within a specific time period.
• The Demand Curve:

  • The curve is downward sloping.
  • A change in price will only cause movement ALONG the demand curve.
  • This is known as the law of demand. The law states that there is an inverse relationship between quantity demanded and the price of a good or service, ceteris paribus.
  • Price is under the assumption that all other things are equal and therefore only extends or contracts along the demand curve.
  • Now if all other things were not equal it would likely induce a shift in the demand curve.
• Movements in a demand curve:

  • A movement along a demand curve is caused by a change in price of a good.
  • A movement from A to B is a contraction in demand, the quantity demanded falls because of an increase in price.
  • A movement from A to C is an extension in demand, the quantity demanded rises due to a decrease in price.

  
• Shifts in a demand curve:

  • A shift of a demand curve is caused by a change in any of the factors which affect demand / the conditions of the demand.
  • A shift from D to D2 is a decrease in demand, because fewer goods are demanded at each and every price.
  • A shift from D to D1 is an increase in demand, because more goods are demanded at each and every price.

  
• Causes of shifts in demand:

  • Changes in taste / fashion
  • Changes in real incomes
  • Changes in legislation
  • Changes in interest rates
  • Changes in population
  • Changes in consumer preferences
  • Changes in prices of substitutes
  • Advertising / promotions of products
• What is a substitute good?

  Where the rise in the price of one good leads to a rise in demand for

  another.
• What is a complementary good?

  Where the rise in the price of one good leads to a a fall in the

  demand of another.
• What is a normal good?

  A normal good is a good for which demand increases as income rises.
• What is an inferior good?

  An inferior good is a good for which demand decreases as income rises.
• Exceptions to the law of demand:

  • Speculative demand – certain products demand is based on the speculation of increasing/decreasing prices and therefore consumers will look to purchase based on future prices.
  • Quality as a price indicator – a lack of information may change a consumers decision making, where a high price acts as an indicator of quality.
  • Veblen Goods – when firms sell goods at a higher price than competitors. Thus creating a ‘snob effect’, where the consumer believes the exclusivity is a signal of their wealth.