2.1

• Demand


  The amount of a good/service that a consumer is willing and able to purchase at a given price in a given time period
• If a consumer is willing to purchase a good, but cannot afford to, it is not effective demand
• Demand curve


  A graphical representation of the price and quantity demanded (QD) by consumers
• Law of demand


  There is an inverse relationship between price and quantity demanded (QD), ceteris paribus
• Individual demand


  The demand of a single consumer
• Market demand


  The combination of all the individual demand for a good/service
• Market demand is calculated by adding up the individual demand at each price level
• Assumptions underlying the law of demand

  • The income effect
  • The substitution effect
  • The law of diminishing marginal utility
• Income effect


  The change in a consumer's purchasing power resulting from a change in the price of a good/service
• Substitution effect


  Consumers will substitute goods/services that have become relatively more expensive with those that have become relatively less expensive
• Law of diminishing marginal utility

  As additional products are consumed, the utility gained from the next unit is lower than the utility gained from the previous unit
• Marginal utility


  The additional utility (satisfaction) gained from the consumption of an additional product
• Increase in price


  Movement up the demand curve (contraction in QD)
• Decrease in price


  Movement down the demand curve (extension in QD)
• Non-price determinants of demand


  Factors that will change the demand for a good/service, irrespective of the price level
• Non-price determinants of demand

  • Changes in real income
  • Changes in tastes/preferences
  • Changes in the price of related goods (substitutes and complements)
  • Changes in the number of consumers
  • Future price expectations
• Increase in real income


  Demand curve shifts right
• Decrease in real income

  Demand curve shifts left
• Good becomes more preferable


  Demand curve shifts right
• Good becomes less preferable


  Demand curve shifts left
• Price of substitute good increases


  Demand for the other good increases (shifts right)
• Price of substitute good decreases


  Demand for the other good decreases (shifts left)
• Price of complementary good increases


  Demand for the other good decreases (shifts left)
• Price of complementary good decreases


  Demand for the other good increases (shifts right)
• Population increases


  Demand curve shifts right
• Population decreases


  Demand curve shifts left
• Expectations that price will rise

  Demand curve shifts right
• Expectations that price will fall

  Demand curve shifts left
• The difference between a movement along the demand curve and a shift in demand is essential to understand