Demand Analysis and Concepts

Study Notes

Substitute goods relationship: Direct relationship between demand for a good and the price of its substitute
Inferior goods relationship: Inverse relationship between income and demand for inferior goods
Demand and price relationship: Expressed symbolically as Dx = f(Px), where demand (Dx) is a function of price (Px)
Demand contraction: A decrease in quantity demanded at a higher price
Demand expansion: An increase in quantity demanded at a lower price
Demand curve: Graphical representation of demand schedule
Multipurpose commodity: A commodity that can have multiple uses
Increase in demand: More quantity demanded due to factors other than price
Demand definition: Desire backed by willingness to purchase and ability to pay
Desire definition: A mere wish to have a commodity

Desire: A wish or wanting a particular commodity
Demand: A desire backed by the ability to and willingness to pay for a particular commodity

Expansion in demand: Increase in demand due to a fall in price, other factors constant
Movement in equilibrium: Equilibrium point of price and demand moves down on the same demand curve
Contraction in demand: Decrease in demand due to a rise in price, other factors constant
Movement in equilibrium: Equilibrium point of price and demand moves up on the same demand curve

Increase in demand: Rise in demand due to factors other than price; favorable changes.
Causes of increase: Rise in income, increased preference for a commodity, decrease in tax
Decrease in demand: Fall in demand due to factors other than price; unfavorable changes.
Causes of decrease: Fall in income, decreased preference for a commodity, increase in tax

Demand curve slope: Downward sloping from left to right; inverse relationship between price and quantity demanded
Reasons for downward slope: Diminishing marginal utility, income effect, substitution effect, multipurpose uses, new consumers

Price: An important determinant; higher price, lower demand, lower price, higher demand
Income: Another significant determinant; higher income, higher demand, lower income, lower demand
Prices of substitute goods: Prices impact demand for substitute goods; lower price of substitute, higher demand for substitute
Prices of complementary goods: Prices impact demand for complementary goods; higher price of complementary good, lower demand for good
Nature of products: Necessity (demand stays same) and non-necessity (change with price)
Population size: Increase in population, increase in demand
Consumer expectations: Future price expectations; future price fall, current decrease in quantity demanded
Marketing activities (advertisements, etc.): Effective advertisements increase demand
Tastes, habits, and fashions: Impact demand based on consumer preference
Level of taxation: Higher taxation, lower disposable income, lower demand

Giffen goods: Inferior goods whose demand increases when price rises. This is a reaction to change in a consumer's purchasing power
Giffen good reaction: Initial income increase to afford new higher priced options; demand increases, leading to a surplus and decrease