Demand & Purchasing Concepts

Study Notes

Demand & Purchasing

Demand is more than just a want, it requires the ability to pay and willingness to pay
Need involves having the financial resources to purchase a good or service
Willingness to pay reflects a consumer's desire for a particular good and their readiness to part with their money for it

Price Script

General price: Refers to the overall price level, often measured by indexes like the Consumer Price Index
Price: The specific price of a good or service
Price Time: The specific period for which the price is valid
Quantity Demanded: The amount of a good or service consumers are willing and able to purchase at a given price

Determinants of Demand

Demand is a function of various factors, including the price of the good, prices of related goods, income, and other factors
SPICE is an acronym summarizing the key factors influencing demand:
- Safe Goods: Consumers are generally willing to pay more for safer goods. This can apply to things like food safety, car safety, and safety features in products.
- Preferences & Lifestyle: Taste and preferences play a significant role in determining demand. Consumers' choices are shaped by their lifestyle, values, and personal likes.
- Income: As income rises, demand for normal goods increases. For inferior goods, demand decreases as income rises.
- Complements & Substitutes: The demand for a good can be affected by the prices of related goods.
  - Complementary goods: Goods used together. An increase in the price of one good leads to a decrease in the demand for its complement.
  - Substitute goods: Goods that can be used in place of one another. An increase in the price of one good leads to an increase in the demand for its substitute.
- Expectations: Consumer expectations about future prices or income can influence current demand.

Types of Goods

Normal Goods: Demand increases as income increases
Inferior Goods: Demand decreases as income increases
Giffen Goods: A specific type of inferior good where demand increases as price increases. This often happens when the good represents a significant portion of the consumer's budget, and there aren't many substitutes available.

Important Differentiation

While all Giffen goods are inferior, not all inferior goods are Giffen goods.
The distinction lies in the unusual nature of Giffen goods, where the price increase actually leads to a higher demand, a phenomenon primarily driven by limited budget constraints and lack of viable alternatives.

Description

Explore the fundamental concepts of demand, purchasing behavior, and price determination in this quiz. Understand the relationship between willingness to pay and the various determinants that influence consumer demand. Test your knowledge on how different factors affect pricing and quantity demanded.