Economics Chapter: Demand Concepts

Demand

• Basic points include: desire/need, money/income, purchasing power (ability to spend money).
• Demonstration effect: impulsive buying influenced by others.
• Demand schedule: table showing demand levels at different prices.
• Types of demand schedules: individual (single person) and market (multiple people).
• Demand curve: graphical representation of a demand schedule.

Demand Schedule Example

• Price | Demand
• 100 | 3
• 80 | 4
• 60 | 5

Determinants of Demand

• Price of related goods (substitutes or complements)
• Income (normal goods or inferior goods)
• Tastes and preferences
• Expectations about future prices
• Population
• Government policy
• Advertisement
• Seasons

Law of Demand

• Other things being equal, as price increases, quantity demanded decreases.
• Price ↑, Quantity Demanded ↓

Exceptions to the Law of Demand

• Giffen Goods: specific inferior goods where demand increases as price increases.
• Veblen Goods: luxury goods where higher prices increase demand due to status symbol.
• Speculative goods: demand increases because people expect future price increases.
• Necessities: some goods are demanded regardless of price.
• Distinction goods: goods bought to show status.

Elasticity of Demand

• Measures responsiveness of quantity demanded to a change in price.
• Price elasticity of demand: percentage change in quantity demanded divided by the percentage change in price.
• Types/degrees of price elasticity of demand: perfectly elastic, perfectly inelastic, unitary elastic, relatively elastic, relatively inelastic.

Supply

• Supply: quantity of a good or service that producers are willing and able to sell at different prices.
• Law of Supply: other things being equal, a higher price leads to a greater quantity supplied. P↑ Qs↑
• Determinants of supply:
  • Price of the good
  • Price of related goods
  • Cost of production
  • Technology
  • Government policy
  • Number of sellers
  • Expectations

Equilibrium

• Equilibrium: the point where supply and demand intersect, determining price and quantity.
• Surplus: when quantity supplied exceeds quantity demanded; price falls.
• Shortage: when quantity demanded exceeds quantity supplied; price rises.
• Factors influencing equilibrium: changes in demand or supply.

Production Function

• Production function: mathematical relationship between inputs and outputs, showing how much can be produced with specific amounts of inputs.
• Time periods in production: very short run, short run, long run. (inputs in varying states of fixed/variable).

Returns to a Factor

• Returns to a factor: effect on output when one input is increased while other inputs are kept constant.
  • Increasing returns to a factor: output increases more than proportionately when a factor is increased, other factors remaining constant.
  • Diminishing returns to a factor: output increases less than proportionately when a factor is increased, other factors remaining constant.
  • Constant returns to a factor: output increases proportionately when a factor is increased, other factors remaining constant.

Isoquants and Isocosts

• Isoquants: graphical representation of production combinations using different input ratios that yield the same output level.
• Isocosts: graphical representation of different input combinations that cost the same total amount.

Total, Average, and Marginal Productivity

• Total Product (TP): total output produced at various levels of input use.
• Average Product (AP): output per unit of input (TP/number of units of input).
• Marginal Product (MP): additional output produced by one more unit of input (TPn-TPn-1).

Marginal Revenue Productivity

• MRP: additional revenue generated by hiring one more unit of a factor of production (MPP x MR).

Revenue

• Total Revenue (TR): total income earned from the sale of a given quantity of output (price x quantity).
• Average Revenue (AR): average income per unit of output (TR/quantity).
• Marginal Revenue (MR): change in total revenue from selling one more unit of output (TRn - TRn-1).

Costs in Short Run

• Fixed Costs (FC): costs that remain constant regardless of output levels (rent, interest, etc.).
• Variable Costs (VC): costs that change with output levels (labor, material, etc.).
• Total Costs (TC): sum of fixed and variable costs.
• Average Fixed Cost (AFC): fixed cost per unit of output (FC/output).
• Average Variable Cost (AVC): variable cost per unit of output (VC/output).
• Average Total Cost (ATC): total cost per unit of output (TC/output).
• Marginal Cost (MC): change in total cost from producing one more unit of output (TCn – TCn-1).

Cost Curves

• Show relationships between output and various costs.
  • (AFC, AVC curves) downward sloping due to fixed costs spreading out over higher output levels
  • (AC curve) U-shaped
  • (MC curve) initially downward sloping, then upward sloping, intersecting AC and AVC at their minimum points.

Welfare Economics

• Branch of economics studying social desirability and policies.
• It studies concepts of efficiency and equity.
• It considers aspects in resource allocation and policy interventions.
• Important figures: Pigou, Pareto, Bergson, Samuelson.

Perfect Competition

• Market structure with many buyers and sellers, homogeneous products, free entry and exit.
• Firms are price takers.
• AR = MR = Price.

Monopoly

• Market structure with one seller, unique product, barriers to entry.
• Firms are price makers.
• AR > MR.

Monopolistic Competition

• Market structure with many sellers, differentiated products, free entry and exit, some control over price.
• AR > MR and downward-sloping.

Oligopoly

• Market structure with a few large sellers, interdependence, potential for collusion.
• Firms are price makers acting strategically.

Explore the fundamental concepts of demand in economics including the demand schedule, determinants of demand, and the law of demand. Understand how various factors like income and related goods influence purchasing behavior. Test your knowledge with examples and exceptions to the law of demand.