Demand
IB Economics
Objectives
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To be able to explain the difference between
‘latent’ and ‘effective’ demand
To be able to explain and give an example of
derived demand
To understand and be able to explain the
difference between a movement along a demand
curve and a shift of a demand curve
To be able to draw shifts of the demand curve
To understand there are sometimes exceptions
to the law of demand
Quick Quiz Wed 21 Sept 2011
1.
Define demand (2 marks)
2.
What is marginal utility (1 mark)
3.
What happens to demand as price rises
(remember terminology!) (1 mark)
4.
Illustrate the impact on consumer surplus
when there is a fall in the price of a good
(4 marks)
Latent Demand
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Latent Demand
• Latent demand exists when there is willingness
to purchase a good, but where the consumer
lacks the real purchasing power to be able to
afford the product
• Latent demand is affected by persuasive
advertising – where the producer is seeking to
influence consumer tastes and preferences
• List 3 products that you have latent demand for
Effective Demand
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Effective Demand
• When a consumers' desire to buy a product is
backed up by an ability to pay for it
Derived Demand (Joint Demand)
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The demand for a product X might be strongly
linked to the demand for a related product Y –
giving rise to the idea of a derived demand
What product might the demand for iPod
Nano’s be derived from?
Name a product that may have a derived
demand as a result for the demand for cars?
Derived demand
The housing market is a good example of the idea of
derived demand. When construction of new homes
rises, so too does the demand for materials used in
new properties as well as demand for labour
Shifts in the demand curve
Changes in the conditions of
demand
Shifts in the Demand Curve
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A change in price causes a movement along
the demand curve whereas a change in any
other factor that influence demand will cause
a shift of the whole curve.
Draw a diagram to show an increase/decrease
in demand
Factors that influence Demand
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Other than price, what factors do you think
will influence the total demand for iPod
Nano’s?
Other than price, what factors do you think
would influence the demand for a new car?
Demand for New Cars
The Price of New
Cars
Consumer
Confidence
Interest Rates
Relative costs of
travelling on public
transport
Relative prices of
second-hand
vehicles
Cost of fuel
Road Charges /
Tax
Availability of
Credit
Costs of car
insurance and
servicing etc
An outward shift of the demand curve
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A rise in the real incomes of consumers e.g. ?
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An increase in the price of a substitute good (i.e. a
competing product) e.g. ?
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A fall in the price of a complementary good e.g. ?
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A change in consumers’ preferences towards the good
e.g.?
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An increase in the size of the total population
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A fall in interest rates that makes borrowing cheaper
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A rise in consumer confidence
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Social changes which affect total demand for a product
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A successful advertising campaign or promotion
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Expectations
Substitutes
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Substitutes are goods in competitive demand
• They are replacements for another product
• For example, a rise in the price of Esso petrol
(other factors held constant) should cause a
substitution effect away from Esso towards Shell
or other competing brands
• Fill out the following diagram to show the effect of
a rise in the price of Esso petrol and what impact
this has on the demand for Shell petrol
Changes in price of Substitutes
Price of
Texaco
petrol
Price of
Shell
petrol
D1
Output (Q)
D1
Output (Q)
Changes in price of Substitutes
Price of
Texaco
petrol
Price of
Shell
petrol
P2
P1
P1
Demand
Q2
Q1
Output (Q)
D1
Q1
Q2
D2
Output (Q)
Complements
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Complements are said to be in joint demand
• Examples include: bread and butter, DVD players
and DVDs, iron ore and steel
• A rise in the price of a complement to Good X
should cause a fall in the demand for X
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Using 2 corresponding diagrams (as previously)
show what would happen to the demand for car
insurance when the price of cars increases.
Normal and Inferior Goods
A normal good will face an increase in
demand as income rises. Eg?
An inferior good faces a decrease in
demand as income rises. They are often
cheaper poorer quality substitutes for some
other good Eg?
Exceptions to the Law of Demand
Giffen Good
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Unique type of inferior good- as the price increases
demand increases
Sir R Giffen (1837-1919) suggested there was a
tendency for the very poor to buy more of the basic
foodstuffs on which they depended when the price
rose, and less when the price fell
Eg. Bread- A rise in price would mean these
consumers have little extra money to spend on meat
(for eg.) so would abandon their demand for these
and instead buy more bread to fill up their stomachs.
Consequently a rise in the price of bread led to a rise
in the demand for bread
Most economists agree there are no real examples of
Giffen goods in developed economies. Some evidence
(Jenson and Miller, 2002) Giffen goods may exist in
the form of rice and noodles in some parts of China
Veblen Goods
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Thorstein Veblen (1857-1929)- as the price
rises demand rises
Some products become more popular as the
price rises
Partly due to ‘conspicuous consumption’people get satisfaction from being seen by
other people to consume expensive goods
“Failure to consume in due quantity and quality
becomes a mark of inferiority and demerit”
Examples?
At low prices a typical Veblen good will have a normal demand curve,
as rice rises eventually the good achieves “snob value status” and
further price rises lead to increases in demand
Price
“Snob Value Status”
D
Quantity
Exceptions to the law of demand
Speculative Demand
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The demand for a product can be affected by
speculative demand. Here, potential buyers are
interested not just in the satisfaction they may get
from consuming the product, but also the potential
rise in market price leading to a capital gain or
profit
Examples?