BA Module 2: Demand

Demand refers to...

The amount of some good or service consumers are willing to purchase at each price. Need and want are the same thing from economist approach.

Demand curve

shows the relationship between price and quantity demanded on a graph. As the price increases, the quantity demanded decreases, and conversely, as the price decreases, the quantity demanded increases.

When quantity demanded decreases in response to a change in price:

there is a movement from one point to another along the demand curve

A shift in demand happens when...

A change in some economic factor (other than the current price) causes a different quantity to be demanded at every price. For example, if people hear that a hurricane is coming, they may rush to the store to buy flashlight batteries and bottled water. If people learn that the price of a good like coffee is likely to rise in the future, they may head for the store to stock up on coffee now.

Inferior good

A product whose demand falls when income rises, and vice versa. In other words, when income increases, the demand curve shifts to the left.

Normal good

A product whose demand rises when income rises, and vice versa. A few exceptions to this pattern do exist, however. As incomes rise, many people will buy fewer generic-brand groceries and more name-brand groceries. They are less likely to buy used cars and more likely to buy new cars. They will be less likely to rent an apartment and more likely to own a home, and so on.

Natalie runs a fast food stand selling hot dogs and soft drinks. A decrease in the price of which good below is likely to negatively impact her bottom line?

Hamburgers; hamburgers and hotdogs are likely to be substitutes, so if the price of the hamburgers falls this will likely shift the demand curve for hot dogs to the left, decreasing her sales of hot dogs

Over the past 10 years consumer incomes have grown by 15%, while the price of automobiles has increased by over 20%. Tires and automobiles are complement goods. What would be a reasonable expectation regarding the demand for tires today compared to 10 years ago?

It is impossible to know with the given information.

If an increase in the price of Nike shoes increases the demand for Adidas shoes, this means that:

Nike shoes and Adidas shoes are substitutes

What would cause the demand curve to shift?

Population grows in a particular market area.

Ceteris Paribus Assumption

The assumption that factors other than those being considered remain the same. For example, we can say that an increase in the price reduces the amount consumers will buy (assuming income, and anything else that affects demand, is unchanged). Additionally, a decrease in income reduces the amount consumers can afford to buy (assuming price, and anything else that affects demand, is unchanged). This is what the ceteris paribus assumption really means.

Quantity demand

The total number of units purchased at that price.

Price

What a buyer pays for a unit of the specific good or service.

A change in demand refers to...

a shift in the entire demand curve, which is caused by a variety of factors (preferences, income, prices of substitutes and compliments, expectations, population, etc.)

A rise in the price of a good or service will...

almost always decreases the quantity of that good or service demanded.

According to the law of demand, assuming other factors are held constant:

as the price of milk decreases, the quantity of milk demanded will increase.

The law of demand states that as the price of a good decreases...

buyers decide to purchase more of it.

A fall in the price of a good or service will...

increase the quantity demanded.

Substitute

is a good or service that can be used in place of another good or service. For example, as electronic books become more available, you would expect to see a decrease in demand for traditional printed books.

The law of demand states that

more of a good will be bought the lower its price, less will be bought the higher its price, ceteris paribus (as long as all other things stay the same). There is an inverse relationship.

A change in quantity demand refers to...

movement along the demand curve, which is caused only by a change in price. In this case, the demand curve doesn't move; rather, we move along the existing demand curve.

Complements

other goods are complements, meaning that the goods are often used together, because consumption of one good tends to enhance consumption of the other. Examples include: cereal and milk, golf balls and golf clubs

Demand schedule

table showing quantities demanded at different possible prices

When higher prices result in a lower quantity demanded, economists call this relationship:

the law of demand