<2.1 DEMAND>

--THE LAW OF DEMAND--

--THE DEMAND CURVE--

--INDIVIDUAL & MARKET DEMAND--

--𐤃 NON-PRICE DETERMINANTS--

--MOVEMENTS & SHIFTS--

"If I asked 100 people if they wanted the latest iPhone 17, I'm pretty sure the response would be 100% yes!"

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"...so should Apple order more raw materials, hire more staff, etc in order to satisfy these extra customers?"

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"Nah!!! Willingness to have the latest phone is not enough. Unless the customers can back that willingness with purchasing power, then the phone companies has no reason to order more raw materials, hire more staff, etc. Willingness backed by the ability to pay is called EFFECTIVE DEMAND in that it directly affects the allocation of scarce productive resources."

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"So what exactly is 'demand'?

"Assuming only effective demand is considered, then we can define DEMAND as 'the amount of a good or service that is demanded at each price level'."

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--THE LAW OF DEMAND--

"So how does Apple price its iPhone?"

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"If they set the price too high, what will happen to the quantity of phones demanded?

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"That's right, higher price => lower Qd ...and what about if they set it too low?"

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That's right, lower price => higher Qd"

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This inverse relationship is called 'THE LAW OF DEMAND', which states that there is a NEGATIVE RELATIONSHIP between price (P) and quantity (Q) of a good demanded: "THE HIGHER (LOWER) THE PRICE, THE LOWER (HIGHER) THE QUANTITY DEMANDED, CETERIS PARIBUS..."

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--THE DEMAND CURVE--

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"When we plot this inverse relationship with the price of the good on the Y-axis and quantity on the X-axis, we 'derive' the DEMAND CURVE.

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"A CONTRACTION IN DEMAND is a decrease in the quantity of a good or service that consumers want to buy because its price has gone up."

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"An EXTENSION IN DEMAND is an increase in the quantity of a good or service that consumers want to buy because its price has gone down."

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--TASK--

"Sketch a demand curve illustrating a price change, and explain what happens in terms of the 'price', 'law of demand', 'contraction' or 'extension', etc." (4 marks)

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"You can use this diagram to help you."

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--INDIVIDUAL & MARKET DEMAND--

"Obviously Apple is not interested in the quantity of phones that a single individual consumer is willing and able to buy at each price level (called 'INDIVIDUAL DEMAND'); it wants to know the quantity that the summation of all individuals in the entire market are demanding at each price level (called 'MARKET DEMAND'), so it can start organising its factors of production to deliver them right!"

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"Diagramatically, this is the 'horizontal summation' of all individual demand curves. Let's see how a market demand curve is derived from individual demand curves below."

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"Further practice on how to construct a demand curve from a demand schedule."

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--THINK ALOUD--

So we have this downward trend that occurs DUE TO CHANGES IN PRICE, as when price falls the quantity demanded rises (and vice versa), but why? What impacted your willingness and ability to pay for pizza when the price changed?

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Q. Is it related to how much money you 'currently' have?

Q. Is it related to the 'current' price of substitutes?

Q. Is it about the amount of satisfaction you receive per slice?

--ASSUMPTION OF LAW (HL)--

--THE INCOME EFFECT--

"As the price of coke falls, I can afford more...!"

"If we assume INCOMES ARE FIXED, a DECREASE IN PRICE will INCREASE the 'PURCHASING POWER' of the income (and vice versa), allowing EXISTING CONSUMERS TO BUY MORE, as well as enticing NEW CUSTOMERS to purchase the more affordable product."

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"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."

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--TASK--

"Explain how this image illustrates the 'income effect'."

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--THE SUBSTITUTION EFFECT--

"As the price of Coke falls, relative to Pepsi, I will now try it.!"

"If we assume THE PRICE OF ALL SUBSTITUTES STAYS FIXED, then a fall in the price of a good with a very close substitute will not only benefit from the 'income effect', but also, they will be ABLE TO ATTRACT CUSTOMERS AWAY FROM THEIR RIVAL, who is now comparatively more expensive."

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"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."

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--TASK--

"Explain how this image illustrates the 'substitution effect'."

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--LAW OF DIMINISHING MARGINAL UTILITY--

"The first sip of Coke is amazing, I'd pay up to £10, but only £5 for the second, and £2 for the 3rd.!"

"According to the LAW OF DIMINISHING MARGINAL UTILITY, the MARGINAL BENEFIT (UTILITY) that a consumer derives from consuming each additional unit of a good GETS PROGRESSIVELY LOWER for EACH ADDITIONAL UNIT CONSUMED. Now if marginal utility is expressed in a monetary form, we can say that the greater the quantity consumed, the lower the marginal utility and the less the rational consumer would be prepared to pay, in other words, THE PRICE A CONSUMER IS WILLING TO PAY GETS PROGRESSIVELY LOWER for EACH ADDITIONAL UNIT."

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"Therefore, we can say that there is an INVERSE RELATIONSHIP between the quantity consumed and the willingness to pay (marginal benefit). In other words, as MORE IS CONSUMED, THE WILLINGNESS TO PAY FALLS..."

"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."

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--TASK--

"Explain how this image illustrates the 'law of diminishing marginal benefits'."

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--THINK ALOUD--

"The law of demand states that a higher price will always lead to a fall in quantity demanded, right? "So what's going on here? Has the law been violated?"

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"Nope, something other than price ('non-price') has determined demand, so the law isn't violated; in this case, the change in the weather is the non-price determinant."

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--𐤃 NON-PRICE DETERMINANTS--

"So A CHANGE IN PRICE creates a MOVEMENT UP or DOWN the DEMAND CURVE, but "...is it only price that impacts the amount of goods demanded?"

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"Nope! There are many, many factors that cause changes in demand, EVEN THOUGH THE PRICE HAS NOT CHANGED, so ask yourself "...Why are more/less of this good being demanded even though the price hasn't changed?"

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--𐤃INCOME--

"Great!!! I now have more money in my pocket, and prices have stayed the same, so I'm buying more!"

"When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER INCREASES (in other words, their REAL INCOME RISES), which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded more are called 'NORMAL GOODS'."

--INCOME RISES => INCREASE IN DEMAND => 'NORMAL GOOD'--

--INCOME FALLS => DECREASE IN DEMAND => 'NORMAL GOOD'--

E.G. LUXURY GOODS, TECHNOLOGY, TRAVEL, PRIVATE EDUCATION...

"When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER increases, which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded LESS of are called 'INFERIOR GOODS'."

INCOME RISES => DECREASE IN DEMAND => 'INFERIOR GOOD'

INCOME FALLS => INCREASE IN DEMAND => 'INFERIOR GOOD'

E.G NECESSITY GOODS, RICE, DOMESTIC FLIGHTS...

--TASK--

TIME TO THINK!

When INCOMES RISES, SPENDING ON MOST GOODS RISES ON AVERAGE, however, THE SIZE OF THIS INCREASE IN SPENDING (As a % of the increase in income) DIFFERS TREMENDOUSLY:
Q. If your income rose by ay 25%, say an extra $2000 pcm, would you expect your spending on FOODSTUFFS to increase by 25% (+$500)? Yes, no, why?
Q. If your income rose by ay 25%, say an extra $2000 pcm, would you expect your spending on SERVICES to increase by 25% (+$500)? Yes, no, why?
Q. If your income rose by ay 25%, say an extra $2000 pcm, would you expect your spending on MANUFACTURED GOODS to increase by 25% (+$500)? Yes, no, why?

--TASK--

TIME TO THINK...AGAIN!

Q. Do you think McDonald's is considered a NORMAL GOOD or an INFERIOR GOOD to the average SINGAPOREAN/ INDIAN/CHINESE?

What can we conclude about the importance of AVERAGE NAT'L/INT'L INCOME LEVELS, when we classify goods as normal or inferior?
What happens to overall demand for McDonalds if there is a large domestic wealth gap and average incomes increase? Will demand for McDonalds increase overall?
Are those that view it as a NORMAL GOOD greater than those who view it as an INFERIOR GOOD?

--𐤃PRICE OF SUBSTITUTES--

"The price of a Coke has risen, so I'm buying more Pepsi!"

"SUBSTITUTES are goods or services that are often bought as alternatives to other goods, therefore any CHANGE IN THE PRICE of one will have a direct impact on the DEMAND for the other."

For SUBSTITUTE Good X and Good Y:

If the PRICE of Good X RISES => The DEMAND for Good Y RISES.

If the PRICE of Good X FALLS => The DEMAND for Good Y FALLS.

--𐤃PRICE OF COMPLEMENTS--

"The price of fries has fallen, so I'm off to buy more ketchup!"

COMPLEMENTS are goods and services that are usually bought in conjunction with the purchase of another good, therefore any CHANGE IN THE PRICE of one will have a direct impact on the DEMAND for the other.

For COMPLEMENTARY Good X and Good Y:

If the PRICE of Good X RISES => The DEMAND for Good Y FALLS.
If the PRICE of Good X FALLS => The DEMAND for Good Y RISES.

--EXPECTATIONS𐤃--

"I think Bitcoin will rise in price, So I better buy now!"

If the PRICE of Good X IS EXPECTED TO RISE => The DEMAND RISES.
If the PRICE of Good X IS EXPECTED TO FALL => The DEMAND FALLS.

--MOVEMENTS & SHIFTS--

--CETERIS PARIBUS--

--CAN THE LAW OF DEMAND BE VIOLATED?--

Given what you know about determinants of demand, can you explain how the following situations occur without violating the law of demand?

"The price of real estate is rising yet so is the demand"

"The price of I-phones are rising yet so is demand"

"The price of umbrellas are rising yet so is demand"

--CETERIS PARIBUS CONDITION--

In reality, both PRICE and NON-PRICE DETERMINANTS impact the amount of a good that is demanded by consumers, as such in order to study the relationship BETWEEN DEMAND and A SINGLE VARIABLE it is necessary to 'HOLD ALL OTHER VARIABLES CONSTANT' aka 'THE CETERIS PARIBUS CONDITION'
For example: When we state the LAW OF DEMAND we must write it like this: "As price rises the Qd falls, ceteris paribus".

--PAST-PAPER--

--10-MARKERS--

--TASK--

https://courses.lumenlearning.com/introbusinesswmopen/chapter/simulation-demand-for-food-trucks/

Why does an increase in price not always lead to a decrease in the quantity demanded?

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