Demand

IB Economics

Objectives

To be able to explain the difference between ‘latent’ and ‘effective’ demand

To be able to explain and give an example of derived demand

To understand and be able to explain the difference between a movement along a demand curve and a shift of a demand curve

To be able to draw shifts of the demand curve

To understand there are sometimes exceptions to the law of demand

Quick Quiz Wed 21 Sept 2011

1. Define demand (2 marks)

2. What is marginal utility (1 mark)

3. What happens to demand as price rises (remember terminology!) (1 mark)

4. Illustrate the impact on consumer surplus when there is a fall in the price of a good (4 marks)

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

Effective Demand

Effective Demand

• When a consumers' desire to buy a product is backed up by an ability to pay for it

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

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

Shifts in the Demand Curve

A change in price causes a movement along the demand curve whereas a change in any other factor that influence demand will cause a shift of the whole curve.

Draw a diagram to show an increase/decrease in demand

Factors that influence Demand

Other than price, what factors do you think will influence the total demand for iPod Nano’s?

Other than price, what factors do you think would influence the demand for a new car?

Demand for New Cars

The Price of New Cars

Interest Rates

Relative prices of second-hand

vehicles

Cost of fuel

Road Charges / Tax

Consumer Confidence

Relative costs of travelling on

public transport

Availability of Credit

Costs of car insurance and servicing etc

An outward shift of the demand curve

A rise in the real incomes of consumers e.g. ? An increase in the price of a substitute good

(i.e. a competing product) e.g. ? A fall in the price of a complementary good e.g.

? A change in consumers’ preferences towards the

good e.g.? An increase in the size of the total population A fall in interest rates that makes borrowing

cheaper A rise in consumer confidence Social changes which affect total demand for a

product A successful advertising campaign or

promotion Expectations

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

• Fill out the following diagram to show the effect of a rise in the price of Esso petrol and what impact this has on the demand for Shell petrol

Changes in price of Substitutes

D1

Output (Q)

Price of Texaco petrol

Output (Q)

Price of

Shell petrol

D1

Changes in price of Substitutes

P1

Q1Q2

Demand

Output (Q)

Price of Texaco petrol

P1

Q1 Q2

D1

Output (Q)

Price of

Shell petrol

P2

D2

Complements

Complements are said to be in joint demand

• Examples include: bread and butter, 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

Using 2 corresponding diagrams (as previously) show what would happen to the demand for car insurance when the price of cars increases.

Normal and Inferior Goods

A normal good will face an increase in demand as income rises. Eg?

An inferior good faces a decrease in demand as income rises. They are often cheaper poorer quality substitutes for some other good Eg?

Exceptions to the Law of Demand

Giffen Good Unique type of inferior good- as the price

increases demand increases Sir R Giffen (1837-1919) suggested there was a

tendency for the very poor to buy more of the basic foodstuffs on which they depended when the price rose, and less when the price fell

Eg. Bread- A rise in price would mean these consumers have little extra money to spend on meat (for eg.) so would abandon their demand for these and instead buy more bread to fill up their stomachs. Consequently a rise in the price of bread led to a rise in the demand for bread

Most economists agree there are no real examples of Giffen goods in developed economies. Some evidence (Jenson and Miller, 2002) Giffen goods may exist in the form of rice and noodles in some parts of China

Veblen Goods Thorstein Veblen (1857-1929)- as the price

rises demand rises

Some products become more popular as the price rises

Partly due to ‘conspicuous consumption’- people get satisfaction from being seen by other people to consume expensive goods

“Failure to consume in due quantity and quality becomes a mark of inferiority and demerit”

Examples?

D

“Snob Value Status”

Price

Quantity

At low prices a typical Veblen good will have a normal demand curve, as rice rises eventually the good achieves “snob value status” and further price rises lead to increases in demand

Exceptions to the law of demand

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

Examples?