2.1 Demand

• The three key assumptions underlying the law of demand are the income effect, the substitution effect, and the law of diminishing marginal utility.
• The income effect refers to the change in a consumer's purchasing power resulting from a change in the price of a good or service. It explains how changes in price affect consumers' purchasing power and their choices among different goods.
• The substitution effect suggests that consumers will substitute goods or services that have become relatively more expensive with those that have become relatively less expensive. It relates to the law of demand by explaining how changes in relative prices influence consumers' consumption choices.
• The law of diminishing marginal utility states that as additional products are consumed, the utility gained from each additional unit decreases. The utility gained from consuming the first unit is usually higher than the utility gained from consuming subsequent units.
• The substitution effect assumes that consumers are rational decision-makers who have perfect information and will adjust their consumption by substituting goods or services that have become relatively more expensive with those that have become relatively less expensive.
• According to the law of diminishing marginal utility, as consumers consume additional units of a good, the satisfaction or utility gained from each additional unit decreases. This makes consumers less willing to pay higher prices for additional units.
• When the price of a good decreases, consumers' purchasing power increases as they can buy more of the good with the same income. When the price of a good increases, consumers' purchasing power decreases as they can afford to purchase less of the good.
• The substitution effect suggests that when the price of a particular good rises, consumers may seek alternatives that provide similar utility or satisfaction at a lower cost. For example, if the price of brand A coffee increases, consumers may switch to brand B coffee assuming it provides a similar level of satisfaction but at a lower price.
• Consumers adjust their consumption patterns based on changes in their purchasing power caused by price fluctuations because the income effect assumes that consumers will respond to changes in price by adjusting their consumption to maintain a certain level of satisfaction given their limited budget.
• Demand is the amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period
• The law of demand states that there is an inverse relationship between price and quantity demanded (QD), ceteris paribus
• Changes in real income directly influence demand. An increase in real income leads to an increase in demand (shifts right on the demand curve), while a decrease in real income leads to a decrease in demand (shifts left on the demand curve).
• Changes in taste/preferences directly impact demand. If a good/service becomes more preferable, the demand increases (shifts right on the demand curve). If a good/service becomes less preferable, the demand decreases (shifts left on the demand curve).
• The price of substitute goods has a direct relationship with the demand for a product/service. When the price of a substitute good increases, the demand for the related good increases (shifts right on the demand curve). When the price of a substitute good decreases, the demand for the related good decreases (shifts left on the demand curve).
• Changes in the number of consumers directly affect demand. If the population size increases, the demand increases (shifts right on the demand curve). If the population size decreases, the demand decreases (shifts left on the demand curve).
• Future price expectations have an impact on demand. If consumers expect the price of a good/service to increase in the future, they will purchase it now and demand will increase (shifts right on the demand curve). If consumers expect the price of a good/service to decrease in the future, they will wait to purchase it later and demand will decrease (shifts left on the demand curve).
• A movement along the demand curve occurs when there is a change in quantity demanded due to a change in price (ceteris paribus). A shift in demand occurs when there is a change in demand due to a non-price determinant of demand.
• Each non-price determinant of demand can shift the entire demand curve either to the right or to the left, regardless of the price level. For example, an increase in Instagram advertising by a firm leads to an increase in demand as more consumers become aware of the product.
• If goods/services become more preferable then demand for them increases. There is a direct relationship between changes in taste/preferences and demand. Advertising or branding can change tastes/preferences
• Substitute goods are goods that are similar (eg. Coca Cola and Pepsi)
• Changes in the price of substitute goods will influence the demand for a product/service. There is a direct relationship between the price of good A and demand for good B.
• Complementary goods are goods that the consumer uses together (eg. Bread and Butter)
• Changes in the price of complementary goods will influence the demand for a product/service. There is an inverse relationship between the price of good A and demand for good B. For example, the price of printer ink (good A) increases so the demand for ink printers (good B) decreases