Determinants of Market Demand IB Economics

Demand: Buyers in the Market 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? Demand is defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. Each of us has an individual demand for particular goods and services. Demand at each market price reflects the degree of value consumers place on item and their expected satisfaction gained from purchase and consumption.

The Demand Curve 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

Factors that influence Demand 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 Availability of Credit Market demand is simply the sum of the individual demand for a product from each consumer in the market. If more people enter the market, then demand at each price level will rise. Cost of fuel Costs of car insurance and servicing etc Road Charges / Tax

Effective Demand Effective Demand When a consumers' desire to buy a product is backed up by an ability to pay for it Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand. For example, many people would be willing to buy a luxury sports car, but their demand would not be effective if they did not have the financial means to do so. They must have sufficient purchasing power. Consider the market for pay-per-view boxing events – the companies promoting these events must price carefully so that they tap into the largest possible market.

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

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. 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 Changes in any of the factors other than price causes the demand curve to shift Changes in the price of the good itself cause a movement along the demand curve

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

Shifts in Demand Quantity Demanded D1 P1 Q1 Q2 D2 Decrease in Demand Price

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 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 Substitutes are goods in competitive demand and act as replacements for another product. For example, a fall in the monthly rental charges of cable companies or Vodafone mobile phones might cause a decrease in the demand for British Telecom services. Consumers will tend over time to switch to the cheaper brand or service provider. When it is easy and cheap to switch, then consumer demand will be sensitive to price changes

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

Normal and Inferior Goods 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 Texaco petrol Price of Shell petrol P2 P1 P1 D2 Demand D1 Q2 Q1 Output (Q) Q1 Q2 Output (Q)

Changes in tastes and preferences 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 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