2.2 Demand

• Demand is defined as ''the willingness and ability to purchase a good or service at the given price in a given period. ''

  There is no effective demand unless someone both wants to purchase the product and has the money to be able to do so. The quantity demanded varies inversely with the price. The inverse relationship (the law of demand) comes about because as the price of a good/service falls, more consumers are now able to afford the product, so they are likely to buy it.
• Individual demand is defined as ''the demand for a good or service by an individual consumer''
• A shift of the demand curve means that the quantity demanded at each price changes, caused by non-price factors. This is defined as ''A complete movement of the existing curve either outward (to the right) or inward (to the left). ''
• A movement along the curve is caused by a change in price alone. This is defined as ''when the price changes, leading to a movement up or down the existing curve''
• Causes of shifts of the demand curve:

  • Income -> A rise in income allows consumers to be more willing and able to buy more goods and services at every price (opposite with a fall in income).
  • Marketing -> Successful marketing e.g. advertising increases the demand for a product
  • Tastes + Fashion -> A rise in demand results from new trends that are 'must-haves', so the demand increases to have those trends.
• Causes of shifts of the demand curve:

  • Substitutes + complements -> The former can be used in place of another good/ service. If the price of one product increases, then people will change to buying the cheaper one. Complements are products that go together e.g. keyboard and desktop computers. If the demand for one goes up, so does the other.
• Causes of shifts of the demand curve:

  • Population -> There are 3 aspects to consider: size, age and gender. If the number of people in a country rises/ decreases, then the demand for goods + services will also rise/ decrease. Change in age means that the majority of the population of a certain age will demand more goods they may need or want. An increase in women of a population increases the demand for goods women favour. This would be equally true if there were an increase in the number of men.
• Consequences of a shift in demand:

  • If demand increases then both price and quantity will rise & vice versa.
  • If prices rise, but incomes rise faster, consumers will demand more.
  • Demand for substitute goods will fall if people prefer other goods and services despite price.
  • If demand falls, producers may go out of business.
• Consequences of a movement in demand:

  • P+Q move in opposite directions. If price rises, quantity falls in terms of demand.
  • If income doesn't change, then an upwards movement will mean they can buy fewer goods. This reverses if the movement is down.
  • Rising prices and falling demand will lower sales & profits. Firms may have to reduce output, making workers unemployed. The effects are opposite if the demand rises.
• ''Price Elasticity of Demand measures the responsiveness of quantity demanded to a change in its price''
• There are 3 types of demand curves:

  • Elastic P.E.D -> demand is highly responsive to changes in price. The % change in D is greater than the % change in price.
  • 'Unit' P.E.D -> Where the % change in demand is the same as the % change in price.
  • Inelastic P.E.D -> Where demand is unresponsive to changes in price... The % change in demand is smaller than the % change in price.
• A disadvantage of P.E.D for consumers is that if goods have inelastic P.E.D, then governments often raise high taxes on these goods. The govt. knows the demand for these products are highly unresponsive to price changes. When tax is added and prices rise, demand changes by very little. As a result, the govt. will receive larger tax revenues, and consumers will have less disposable income for expenditure on other products.
• However, P.E.D may not be that bad for consumers, as governments may be able to improve standards of living, with the funding received from higher taxation. Sectors such as healthcare, education and social security will benefit from increased funding, helping to improve living standards and induce economic growth, so the government are able to achieve objectives too. The consumers as an innocent third party will benefit from the positive externalities.
• An advantage of P.E.D for producers is that it can help them work out a pricing strategy in order to maximise total revenue. If a product has elastic demand the firm should lower the price, whereas if a product has inelastic demand the firms should raise the price *see relevant diagrams in notes*
• P.E.D. may not be as useful for firms if they have other objectives, rather than only maximising revenue. If the firm is more worried about better quality it provides or increasing the business size then P.E.D will be less useful.
• To conclude, the usefulness of P.E.D will depend upon how accurate the data is, as if it is out of date or inaccurate, it's relevance is useless regardless of the objectives.