2.1 Demand
Definitions
Market- Arrangement that allows buyers and sellers to get info and trade
Competitive Market- Many buyers and sellers, meaning no singular person can influence prices
Money Price- The amount of money needed to buy a good
Relative Price- The ratio of money price to money price of next best alternative good
opportunity cost
Demand- The relationship between the price and quantity demanded of a good.
Three things you must have to demand something
1. Want it
2. Afford it
3. Have a definite plan to buy it
Wants- Are the unlimited desires people have for goods and services
Quantity Demanded- The amount the consumer(s) plan to buy during a time period or
particular price
Demand Curve- Is the consumers’ willingness and ability to pay for a good at a given price or
time
Ceteris Paribus means “all else equal”
Law of Demand
The Law of Demand states that the higher the price of a good; the smaller quantity demanded,
and the lower the price of a good; the higher quantity demanded.
Substitution Effect- When there is an increase in cost for a good or service, consumers will
purchase less of that product and more of the products substitute.
Income Effect- When there is an increase in relative price, customers have less money to spend
on goods, including the good or service whose price changed.
Demand Curve
Demand Schedule
The demand schedule shows the quantities demanded for
a good at each price, assuming all other factors remain the
same.
The demand curve shows the relationship between demand
and price of a certain commodity. X = Quantity, Y = Price.
This can also be called the Marginal Curve or Willingness and
Ability to Pay Curve.
Demand Curve
A Change in Demand
External factors that were once assumed to remain the same can alter the curve.
When demand increases the graph shifts to the right
When demand decreases the graph shifts to the left
Any movement on the curve is called a change in quantity demanded.
Any shift on the graph is called a change in demand
Factors Affecting Change
Prices of Related Goods- Price changes in compliments and substitutes will also affect the
demand for the original product.
Expected Future Prices- If the price is predicted to rise/fall, current demand will
increase/decrease
Income- When income increases consumers will buy more
Normal Good- Demand increases as income increases
Inferior Good- Demand decreases as income increases
Expected Future Income and Credit- Like future prices if income is expected to rise in the
future willingness and ability to buy will increase. This is also true with credit.
Population- Demand will increase if population increases.
Preferences- Preference determines value that consumers place on a good. As popular
preference changes so will demand.