Demand

Think of 1 product or service that you bought recently What made you purchase it? How much did you pay for it? If the price doubled would you still have bought it? If the price halved, what would you have done?

The demand curve A graph showing how much of a good or service will be bought by consumers at any given price

Price If price changes then demand will be shown by a MOVEMENT ALONG the demand curve

The Law of Demand and the Demand Curve Price A contraction of demand P2 P1 Demand (D) Quantity Demanded (Qd) 5

The Law of Demand and the Demand Curve Price P2 P1 An expansion of demand P3 Demand (D) Quantity Demanded (Qd) 6

Movements in demand In the ‘Individual demand 1’ column of your table, write down how many video games you would buy each year at the different price levels. Once you have done this, find out what everyone else in your class bought at the different prices and fill in the ‘Market demand 1’ column of your table. Price of video game Market demand 1 £10 £20 £30 £40 £50 £60 Task: Using the market demand data, plot the demand curve for video games with price on the y-axis and quantity on the x-axis. Label it D1.

‘Other things being equal’ Ceteris Paribus ‘Other things being equal’ We are looking at a change in 1 variable, in this case price, whilst other influences are constant such as income

A shift in the demand curve

Shifts of demand As the last exercise demonstrated, price clearly affects demand for a product. There are many non-price factors that also affect demand. Suppose your income has doubled since you filled in the table. Write down how many video games you will buy at each price now you are wealthier in the ‘Individual demand 2’ column. Then fill in the ‘Market demand 2’ column. Price of video game Market demand 1 Market demand 2 £10 £20 £30 £40 £50 £60 Task: Plot the second demand curve on the same diagram as D1. Label this D2. Extension: Can you think of any other factors that could cause you to demand more video games when the price remains unchanged?

Shifts in the demand curve Some factors will cause the demand curve to MOVE or SHIFT What could these be? Changes in the price of substitute goods Changes in the price of complimentary goods Changes in real incomes Changes in taste

Causes of an outward shift in demand A rise in the real incomes of consumers An increase in the price of a substitute good (i.e. a competing product) A change in consumers’ preferences towards the good An increase in the size of the total population A fall in interest rates (e.g. if the product is often bought using loan finance) A rise in consumer confidence (important for “big ticket” items of spending) Social changes which affect total demand for a product 12

Shifts in Demand Quantity Demanded D1 P1 Q1 Q2 Q3 D2 D3 Increase in Demand Decrease in Demand 13

Change in the price of substitute goods – Tea and coffee What do you think will happen to the demand for coffee if the price of tea goes up?

Change in the price of complimentary goods – Tea and milk What do you think will happen to the demand for tea if the price of milk goes up?

The Factors Affecting the 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 Availability of Credit Cost of fuel Costs of car insurance and servicing etc Road Charges / Tax 16

Worksheet

A shift in demand to the right (Increase in demand) A shift in demand to the left (Decrease in demand) A rise in the price of substitutes A fall in consumer income A fall in the price of substitutes A negative change in tastes and fashion A positive change in tastes and fashion A rise in the price of complements A fall in the price of complements An increase in consumer income

Draw a diagram to illustrate what would happen under the following circumstances. State whether you think the goods are complements or substitutes or whether there is another reason for the effect on demand The effect for demand for petrol following an increase in the price of cars. The effect on demand for public transport following an increase in the price of petrol. The demand for Ipods following an increase in the price of downloads The effect on demand of playstation 3s if the price falls The effect on demand for holidays if income increases The effect on demand for umbrellas during a rainy spell The demand for Big Macs if the price of Whoppers rises Demand for foreign holidays if airport tax rises

The law of diminishing marginal utility Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service Total utility: The total satisfaction from a given level of consumption Marginal utility: The change in satisfaction from consuming an extra unit Standard economic theory believes in the idea of diminishing returns i.e. the marginal utility of extra units declines as more is consumed