1.2.2 Unit content Students should be able to: Define demand Explain how a change in price causes a movement along a demand curve Assess factors which may cause a shift in the demand curve (conditions of demand) Distinguish between movements along a demand curve and shifts of a demand curve Evaluate the concept of diminishing marginal utility and assess how this influences the shape of the demand curve

Definitions: market and demand What is a market? Buyers demand goods from the market whilst sellers supply goods. Demand is the amount that consumers are willing and able to buy at a given price.

Effect of change in price on demand What happens to the quantity demanded as prices fall? What happens to the quantity demanded as prices rise?

The ‘law of demand’ The ‘law of demand’ states that as a good’s price falls, the quantity demanded increases, so there is an inverse relationship between price and quantity demanded. Similarly as the price rises, a _______ quantity is demanded.

Effective demand in a market It is important to understand that economists only recognise demand when it is effective demand. What is effective demand?

The demand curve The demand curve shows the relationship between the price and the amount consumers intend to buy at each given price. Note that intended demand (planned demand) may actually differ from how much is bought (realised or actual demand)

What does a demand curve show? What does ceteris paribus mean?

Why do demand curves slope downward? Slope of a demand curve Why do demand curves slope downward?

Movement along a demand curve The level of demand determines where on the graph it sits i.e. low demand is near to the origin and high demand is further away. A movement along a demand curve only occurs when there is a change in the price of the good

Shifting demand curves Changes in any of the factors other than price causes the demand curve to shift: Left (less demanded at each price) or Right (more demanded at each price) Price Quantity

What factors shift the demand curve?

Inferior goods Inferior goods are goods for which demand actually _______ as income rise E.g.

Three reasons why demand curves slope down The law of diminishing marginal utility  The income effect The substitution effect

Diminishing marginal utility The Law Of Diminishing Marginal Utility is a law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a __________ in the marginal utility that person derives from consuming each additional unit of that product. Remember the marshmallows!

Remember marginal utility differs from total utility Complete the table below and comment BARS TOTAL UTILITY MARGINAL UTILITY 1 100   2 190 90 3 270 80 4 70 5 400 6 450 50 7 40 8 520 9 540 20

The income effect If we assume that income is fixed, the income effect suggests that, as the price of a good falls, real income - that is, what consumers can buy with their income - rises and consumers __________ their demand. Therefore, at a lower price, consumers can buy more from the same income, and, ceteris paribus, demand will rise. Conversely, a rise in price will ___________ real income and force consumers to cut back on their demand.

The substitution effect In addition, as the price of one good falls, it becomes relatively less expensive. Therefore, assuming other alternative products stay at the same price, at lower prices the good appears ___________, and consumers will switch from the expensive alternative to the relatively _________ one. It is important to remember that whenever the price of any resource changes it will trigger both an income and a substitution effect.

Exceptions to the rule There are exceptions to the rule but they are not on your syllabus! Giffen goods – as the price rises people are forced to buy more as these are staples goods e.g. Veblen goods – as the price rises people buy more as these are s________ s______ (also known as the conspicuous consumption effect)