Download Intro to Demand

Determinants of Market
Demand
IB Economics
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Demand: Buyers in the Market

Demand:
• The quantity of a product that consumers are
willing and able to buy at a given price over a
given period of time
• Consider the demand for iPod Nano’s or iPod
Touches – what will happen to the demand as the
price decreases?
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The Demand Curve
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
Draw a diagram to show the relationship
between the price of iPod Nano’s or Touches
and their price

On the diagram illustrate a contraction in
demand as a result of an increase in price and
an extension in demand as a result of a
decrease in price
Downward-sloping demand curve

Firstly at lower prices, consumers can afford to
purchase more with their income

Secondly, a fall in price makes one good relatively
cheaper than a substitute

Thirdly, a fall in price means that the consumer derives
more benefit per Euro spent on the product than they
did before
N.B.
The demand curve is normally drawn in textbooks as a
straight line suggesting a linear relationship between
price and demand, but in reality, the demand curve will
be non-linear
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Factors that influence Demand
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
What factors do you think will influence the
total demand for iPod Nano’s or Touches?

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
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Availability of
Credit
Costs of car
insurance and
servicing etc
Effective Demand

Effective Demand
• When a consumers' desire to buy a product is
backed up by an ability to pay for it
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Latent Demand

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
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Derived Demand (Joint Demand)

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
Derived demand is defined as when the want
for one good or service happens because of the
want for another good or service.
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
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
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Shifts in the demand curve
Changes in the conditions of
demand
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Shifts in Demand
Price
Increase in
Demand
P1
D1
D3
Q3
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Q1
Q2
D2
Quantity
Demanded
Shifts in Demand
Price
Decrease in
Demand
P1
D2
Q2
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Q1
D1
Quantity
Demanded
An outward shift in demand
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
A rise in the real incomes of consumers

An increase in the price of a substitute good (i.e. a
competing product)

A fall in the price of a complementary good

A change in consumers’ preferences towards the good

An increase in the size of the total population

A fall in interest rates

A rise in consumer confidence

Social changes which affect total demand for a product
Substitutes

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
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Complements

Complements are said to be in joint demand
• Examples include: fish and chips, 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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Normal and Inferior Goods
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
For normal products, more is demanded as
income rises, and less as income falls

There are exceptions called inferior products

They are often cheaper poorer quality
substitutes for some other good

With a higher income a consumer can switch
from the cheaper substitute to preferred
alternative

As a result, less of the inferior product is
demanded at higher levels of income
Changes in price of Substitutes
Price of
Texaco
petrol
Price of
Shell
petrol
P2
P1
P1
Demand
Q2
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Q1
Output (Q)
D1
Q1
Q2
D2
Output (Q)
Changes in tastes and preferences
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
Market demand in nearly every market is often affected
by changes in consumer preferences

One person’s preferences can affect those of others

This is a very powerful force in digital markets e.g.
iTunes, demand for DVDs

But it is also powerful when influencing the demand for
meals at restaurants, hotels in holiday destinations et al

Advertising and marketing are explicitly designed to
influence consumer tastes and preferences
Exceptions to the law of demand
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
Ostentatious consumption

Some goods are luxurious items where satisfaction
comes from knowing both the price of the good and
being able to flaunt consumption of it to other people!

Speculative Demand

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