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--2.3.1 DEFINITION--
--INTRODUCTION--
In unit 1.1 we read that in a FREE MARKET SYSTEM, WHAT TO PRODUCE, is determined by CONSUMERS who guide producers about how to allocate their productive resources through their DEMAND and WILLINGNESS TO PAY, so now let's learn about the concept of DEMAND.
--DEFINITION: DEMAND--
DEMAND refers to the amount of a good or service that is demanded at each price level
EFFECTIVE DEMAND refers to demand from consumers who possess the WILLINGNESS and ABILITY (In terms of income) to purchase a good or service.
DEMAND, therefore, guides the decisions of the owners of the factors of production regarding how they allocate their resources.
--DEFINITION: LAW OF DEMAND--
THE LAW OF DEMAND refers to a law stating 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."
--2.3.2 DEMAND CURVE--
--2.3.3 INDIVIDUAL/MARKET DEMAND--
--2.3.4 SHIFTS--
--𐤃INCOME--
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--
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--
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--
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.
--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".
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