IGCSE Economics: Demand

IGCSE Economics: Demand

Introduction:

• Demand refers to the willingness and ability of someone to pay for a good or a service at a given price.
• There is a negative relationship between price and quantity demanded.
• When there is a fall in price and a resultant increase in quantity demanded than there is an expansion.
• When there is a rise in price and a resultant fall in quantity demanded than there is a contraction. (Expansion and contraction are also used in supply theory in a similar context.
  Don’t waste time
  Get Your Custom Essay on

  “IGCSE Economics: Demand”

  Get High-quality Paper

  helping students since 2016

  )

Types of Goods and Services:

• Substitute goods are goods and services that can be used instead of one another:
  • e. Pepsi and Coca Cola.
  • If the price of a substitute good or service were to increase:
    • The quantity demand of its competing opponent will increase:
      • For instance, if the price of Coca Cola was to rise, its quantity demanded will fall, than there will be a resultant increase in the quantity demanded of Pepsi.
    • Complementary goods are goods and services that need to be used together to produce the desired effect:
      • e. DVD discs and DVD recorders/players.
      • If the price of a complementary good increases than there is a good chance of the quantity demanded of its partner good decreasing:
        • These goods are in joint demand:
          • For instance, if the price of DVD players were to increase than the quantity demanded of DVD players would decrease, causing a fall in the quantity demanded of DVDs because less and less people would own a DVD player.
            Get quality help now

            

            Bella Hamilton

            Verified

            Proficient in: Economics

            5 (234)

            “ Very organized ,I enjoyed and Loved every bit of our professional interaction ”

            

            +84 relevant experts are online

            Hire writer

Income

• Generally if there is an increase in income than there is also an increase in quantity demanded and vice versa.
• Income is split into three types:
  • Real income (the amount of money that you earn, such as your salary, after having been adjusted for inflation).
  • Disposable income (the amount of money that is kept after your taxes are paid):
  • Discretionary income (the amount of money that is left after you have paid your mortgages and loans – in essence this is the money that is left for you to spend as you wish).

Factors that Affect Demand:

• Price (only ever causes extensions or contractions along the demand curve):
  • Prices go down, quantity demanded goes up, c.p.
  • Prices go up, quantity demanded goes down, c.p.
• Income:
  • Real income (adjusted for inflation).
  • Disposable income (after income tax is deducted).
    • Income tax affects demand more than supply
      • A lower income tax would mean that a person has more money to spend and so increases aggregate demand in an economy.
    • Supply is affected by indirect taxes and corporate taxes.
  • Discretionary income (disposable income after committed interest repayments, such as loans and mortgages, are paid).
  • In economics, the letter Y is usually used to denote income.
  • Increase in income usually leads to an increase in quantity demanded but not always:
    • Just because you earn more does not mean you are going to end up buying and eating more food.
    • Or because when one is richer they will not purchase inferior goods in which case quantity demanded will actually fall.
  • Expenditure taxes also affect the demand for goods and services.
    • This is because they increase the price of each good or service at all price levels.
  • Fashion and trends of the day.
    • Advertising may have an affect on these.
  • Advertising (persuasive and informative):
    • McDonald toys are a form of persuasive advertising.
    • Government agencies use informative advertising to bring across messages like Don’t Drive Drunk and Don’t Smoke!
  • Habits (such as smoking and other such addictive things, although these habits may also include other things such as reading and eating a certain type of food), trends and preferences of the consumers.
    • If habits are addictive, then quantity demanded is unlikely to change even if price changes thus demand for these goods is price inelastic.
    • If habits are not addictive then demand for these goods would not be as inelastic but would still be quite inelastic because people may still be willing to buy that good even if its prices have risen a little.
  • Brand name:
    • Brands with good brand names will be preferable to consumers (Pepsi-Coke challenge).
    • Some consumers habitually prefer one brand over another thus they will still demand that brand even if its prices rise a little.
  • Population of the consumers; these include factors like age, size of population, gender and ethnicity:
    • Elderly people require healthcare and pharmaceuticals.
    • Young demand things like game consoles.
    • Females demand things like jewelry and cosmetics.
    • Males demand things like cars and BB guns.
    • Religious groups demand churches.
    • If the total population rises, the demand for residences will rise.
    • An ethnic group is a group of people with a specific cultural, religious or other such background.
  • Season, predominately affecting the demand for certain types of clothing.
    • In winter people demand jackets and coats and heaters.
    • In summer people demand T-shirts, shorts and the like as well as air conditioning (this manifests as an increase in electricity consumption, mostly).
    • In the rainy season people demand umbrellas, rain coats and dehumidifiers and such like.
  • The price and availability of substitute goods (goods that can be used to replace one another):
    • Coke and Pepsi.
    • Boeing airplanes and Airbus airplanes.
    • These include different brands as well; such as Nike shoes and Addidas shoes.
    • Goods with many close substitutes tend to be demand elastic because it is easier to replace one good with another.
    • Goods with no substitutes tend to be very demand inelastic because it is impossible to replace this good with another.
    • If the price of one goes up then the demand (not quantity demanded) for the other tends to rise because the other is now cheaper in relation to its substitute good and vice versa.
  • The price and availability of complementary goods (goods that are used together with one another). These goods are said to be in joint demand:
    • DVDs and DVD players.
    • Airplanes and kerosene.
    • Desktop computers and computer monitors.
    • If the price of one rises than the demand (not quantity demanded) for the other falls and vice versa because with a higher price it becomes more costly to use such goods.
  • Expectation of price change:
    • If one expects the price of a certain type of good to rise in the future one might decide to purchase more of that good for future use:
      • such goods include oil and gold predominately.
      • Please note that this is also the case in stock exchanges but in a rather different manner.
    • Exogenous shocks such as disease, natural disasters, and terrorism.
    • Changes in legislation.
    • Remember that there are goods and services that are exempt to these factors, these goods include tap water and electricity both of which have no substitutes to speak of and are necessity items and thus their prices are government regulated.
      • Luxury items do not have to have close substitutes to be demand elastic:
        • Take for instance, caviar. This is a luxury item and yet no other type of food quite has its taste or texture.

Movements along a Demand Curve

• If there is a change in the price of goods or services than there will be movement along the demand curve for that good or service:
  • Remember that whenever there is an increase in price then there will also be a decrease in quantity demanded and vice versa, assuming ceteris paribus.
  • Remember that whenever there is a change in price it is almost always a movement along the demand curve and never a shift.
• An increase in quantity demanded is called an expansion of demand.
• A decrease in quantity demanded is called a contraction of demand.

Shifts of the Demand Curve:

• If the quantity demanded of a certain good or service changes but there is no change in price than the demand curve is said to shift. This is said to be a change in demand.
• If there is an increase in demand the quantity demanded increases for all prices causing the demand curve to shift to the right and vice versa, c.p.
  • For instance more umbrellas are demanded due to rainy season.
  • Or fewer umbrellas are demanded due to the beginning of the dry season.
• Factors that could shift the demand curve include only non-price factors.