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1.2.2 Unit content
Students should be able to:
• Define demand
• Explain how a change in price causes a
movement along a demand curve
• Assess factors which may cause a shift in
the demand curve (conditions of demand)
• Distinguish between movements along a
demand curve and shifts of a demand curve
• Evaluate the concept of diminishing
marginal utility and assess how this
influences the shape of the demand curve
Definitions: market and demand
What is a market?
Buyers demand goods from the market
whilst sellers supply goods.
Demand is the amount that consumers are
willing and able to buy at a given price.
Effect of change in price on demand
What happens to the quantity demanded as
prices fall?
What happens to the quantity demanded as
prices rise?
The ‘law of demand’
The ‘law of demand’ states that as a
good’s price falls, the quantity demanded
increases, so there is an inverse
relationship between price and quantity
demanded.
Similarly as the price rises, a _______
quantity is demanded.
Effective demand in a market
It is important to understand that
economists only recognise demand when it
is effective demand.
What is effective demand?
The demand curve
The demand curve shows the relationship
between the price and the amount
consumers intend to buy at each given
price.
Note that intended demand (planned
demand) may actually differ from how
much is bought (realised or actual demand)
What does a demand curve show?
What does ceteris paribus mean?
Slope of a demand curve
Why do demand curves slope downward?
Movement along a demand curve
The level of demand determines where on
the graph it sits
i.e. low demand is near to the origin and
high demand is further away.
A movement along a demand curve only
occurs when there is a change in the
price of the good
Shifting demand curves
Changes in any of the factors other than
price causes the demand curve to shift:
Left (less demanded at each price) or
Right (more demanded at each price)
Price
Quantity
What factors shift the demand curve?
Inferior goods
Inferior goods are goods for which
demand actually _______ as income
rise
E.g.
Three reasons why demand curves slope down
1.
2.
3.
The law of diminishing marginal
utility
The income effect
The substitution effect
Diminishing marginal utility
The Law Of Diminishing Marginal
Utility is a law of economics stating that
as a person increases consumption of a
product - while keeping consumption of
other products constant - there is a
__________ in the marginal utility that
person derives from consuming each
additional unit of that product.
Remember the marshmallows!
Remember marginal utility differs from total utility
Complete the table below and comment
BARS
TOTAL
UTILITY
1
100
2
190
90
3
270
80
4
MARGINAL
UTILITY
70
5
400
6
450
7
50
40
8
520
9
540
20
The income effect
If we assume that income is fixed, the
income effect suggests that, as the price of
a good falls, real income - that is, what
consumers can buy with their income - rises
and consumers __________ their demand.
Therefore, at a lower price, consumers can
buy more from the same income,
and, ceteris paribus, demand will rise.
Conversely, a rise in price will ___________
real income and force consumers to cut
back on their demand.
The substitution effect
In addition, as the price of one good falls, it
becomes relatively less expensive.
Therefore, assuming other alternative
products stay at the same price, at lower
prices the good appears ___________, and
consumers will switch from the expensive
alternative to the relatively _________ one.
It is important to remember that whenever
the price of any resource changes it will
trigger both an income and a substitution
effect.
Exceptions to the rule
There are exceptions to the rule but they
are not on your syllabus!
Giffen goods – as the price rises people are
forced to buy more as these are staples
goods e.g.
Veblen goods – as the price rises people
buy more as these are s________ s______
(also known as the conspicuous
consumption effect)