Economics Chapter on Demand

Meaning of Demand

• Demand refers to the quantity of a product or service that consumers are willing and able to purchase at various price levels.
• It represents not just desire, but also purchasing power and intent to buy.

Determinants of Demand

• Price of the Good: Typically, as price decreases, demand increases (and vice versa).
• Consumer Income: An increase in incomes usually raises demand for normal goods and decreases demand for inferior goods.
• Prices of Related Goods: Demand can shift due to changes in prices of substitutes (increase in price of substitute increases demand) and complements (increase in price of complement decreases demand).
• Consumer Preferences: Changes in consumer tastes and preferences can lead to shifts in demand.
• Number of Buyers: A change in the number of consumers in the market affects overall demand.
• Expectations: Anticipated future prices can influence current demand; for example, if prices are expected to rise, current demand might increase.

Law of Demand

• The Law of Demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and as the price increases, the quantity demanded decreases.
• This relationship is typically represented with a downward-sloping demand curve.

Movement along the Demand Curve vs. Shift of the Demand Curve

• Movement along the Demand Curve: Caused by a change in the price of the good itself, leading to a change in quantity demanded.
• Shift of the Demand Curve: Occurs when factors other than the price of the good change, resulting in a new demand curve; can shift to the right (increase in demand) or left (decrease in demand).

Define and Measure Elasticity

• Elasticity measures how responsive the quantity demanded is to a change in price, income, or price of substitutes.
• Price elasticity of demand (PED) is calculated using the formula: % change in quantity demanded / % change in price.

Concepts of Price, Cross and Income Elasticities

• Price Elasticity of Demand: Indicates how demand changes in response to price changes; if PED > 1, demand is elastic, if PED < 1, demand is inelastic.
• Cross Elasticity of Demand: Measures the responsiveness of demand for one good to a change in the price of another good; positive for substitutes, negative for complements.
• Income Elasticity of Demand: Indicates how demand changes with consumer income; normal goods have positive elasticity, while inferior goods have negative elasticity.

Determinants of Elasticity

• Availability of Substitutes: More substitutes lead to higher elasticity.
• Necessity vs. Luxury: Necessities tend to have inelastic demand; luxuries are more elastic.
• Proportion of Income: Goods that take up a larger portion of income tend to have more elastic demand.
• Time Period: Demand tends to be more elastic in the long run as consumers find alternatives.

This quiz explores the concept of demand and its determinants in economics. It covers factors such as price, consumer income, related goods, preferences, number of buyers, and expectations. Test your understanding of these critical components that influence consumer behavior.