2.2 Demand

• Demand


  The willingness and ability to purchase a particular good or service at a given price at a given point in time
• Individual demand


  Demand for a good or service by an individual consumer
• Market demand


  Total demand for a product created by adding together all the individual demands
• Demand curve


  A graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time
• A change in price


  Leads to a movement along a demand curve
• Increase in price


  Leads to a contraction of demand
• Decrease in price


  Leads to an extension of demand
• Law of demand


  For most goods and services, the quantity demanded will fall as the price rises, showing an inverse relationship
• As the price of a good or service falls, consumers have more money left over so that they can buy more of the good and service with the same amount of money
• As the price of a good or service falls, more consumers are now able to afford the product, so they are likely to purchase it
• An increase in price

  Leads to a contraction of demand because as the price rises there will be a fall in the quantity demanded
• Shift in the demand curve

  The demand curve itself can shift to the left or to the right for a change in a factor OTHER THAN PRICE
• If the demand curve shifts to the right

  We call it an increase in demand
• If the demand curve shifts to the left

  We call it a decrease in demand
• This is not to be confused with extension and contraction of demand which happens when we move along the demand curve
• Factors that can shift the demand curve

  • Income (or disposable income)
  • Tastes and preferences
  • Advertising
  • Seasonal changes
  • Substitutes and complements
  • Population size and demographic
  • Expectations of future price changes
  • The state of the economy as a whole
• Price Elasticity of Demand (PED)


  Measures the responsiveness of the quantity demanded of a good or service to a change in its price
• Price elastic demand


  When demand is very responsive to a change in price
• Price inelastic demand


  When demand is not very responsive to a change in price
• Calculating PED


  1. Percentage change in quantity = (Q2 - Q1) / Q1

  2. Percentage change in price = (P2 - P1) / P1

  3. Where P1 and Q1 are the original price and quantity, and P2 and Q2 are the new price and quantity
• Perfectly inelastic demand


  A change in price will have no effect on quantity demanded
• Perfectly elastic demand


  A change in price will cause an infinite change in the quantity demanded
• Inelastic demand


  The % change in quantity demanded is less than the % change in price (i.e. demand is not very responsive to changes in price)
• Unitary elasticity


  The % change in quantity demanded equals the % change in price
• Elastic demand


  The % change in quantity demanded is more than the % change in price (i.e. demand is very responsive to changes in price)
• When demand is inelastic


  Price and revenue move in the same direction
• When demand is elastic


  Price and revenue move in opposite directions
• If demand is inelastic, governments may choose to tax this product as they know they will receive significant tax revenue
• Consumers may be more responsive to changes in price at different times or in different places, and prices may reflect this
• PED for a product may be different at different times of the year