What is demand?
Price and demand are inversely related i.e. as price increases the quantity demand decreases. This describes the demand curve is downward sloping.
1. The real income effect
Important key term:
Demand schedule: This is a table showing quantity demanded by consumers at each price level. This is table used to draw a demand curve.
Why does the demand curve shift?
1. Tastes – social trends and fashion changes and this affects the demand for a good, For example at one point cassettes were very popular but as soon as CDs came the fashion changed to listening to CDs. The demand for cassette tapes decreased.
2. Income – If income increases then people have more purchasing power so the demand at every price level will increase. Vice versa if incomes suddenly decreased than the demand would decrease as people do not have a strong purchasing power.
3. Price of substitutes – substitutes as we mentioned before are alternatives. So if these decrease people are likely too buy more of them as their consumer surplus increases. This means that the good itself will incur a reduction in demand. For example if Pantene Pro-V hairspray became cheaper the demand for L’oreal hairspray would decrease because people would switch to the pantene Pro-V hairspray.
4.The price of complements – these are goods which complement each other i.e. go with each other. For example tea and milk. If the price of complement increases then the demand decreases. So for example if the price of milk rises then the demand for tea will decrease as people may switch tcheapero other cheaper alternative like black coffee or herbal tea,
5. Expectation of future price change – this doesn’t tend to be as big as other factors. But in markets such as the housing industry or the share it has a big impact. If for example houses were supposed to increase prices in the future then the demand for houses will increase because people will wan to buy as they know they can sell it at a later date for a profit.
6. Population increase/migration- If there are more people then the demand for a product is likely to be be bigger. The two main ways in which a population can change are (i) population increase/ decrease through baby boom or increased availability of contraception and (ii) migration – this means people moving in and out of a country.
7. Distribution of income – This is by far the most interesting one. this suggest if the government increased taxes or benefits to the poor then demand for necessities will increase as that is what poor people will demand and the demand for luxuries will decrease as rich people loose some of their purchasing power for it,
1. Demand for a normal product may cause the demand curve to shift outwards if…
a) price increases
b) price decreases
c)the price of a substitute falls
d) the price of a substitute rises.
2.A decrease in income should:
a) Shift demand for an inferior product outwards
b) Shift demand for an inferior product inwards
c) Shift supply for an inferior product inwards
d) Shift supply for an inferior product outwards
Answers under photo…
1) D- The demand curve will only shift outwards because of non-price factors such as the price of substitutes. If the price of substitutes increases then people are more likely to switch and buy this product. For example; orange juice and apple juice are close substitutes and if the price of apple juice goes people more people will be attracted to buy orange juice.
2) A – if income decreases then the quantity demand of an inferior will increase as they have an inverse relationship. Supply is not affected by the income elasticity of a product.