Economics: Demand Concepts

Study Notes

Demand

Demand is the willingness and ability of consumers to buy goods or services at a specific price.
Price is a primary factor influencing demand; as prices increase, quantity demanded typically decreases (law of demand).
Higher consumer income increases purchasing power, leading to increased demand for goods and services.
Consumer tastes and preferences impact demand; shifts towards healthier options can boost demand for organic products.
Expectations about future prices and income can prompt consumers to adjust current demand accordingly.
An increase in the number of consumers in the market raises overall demand, exemplified by population growth or immigration.
Elasticity of demand measures how responsive quantity demanded is to price changes; it can be elastic, inelastic, or unit elastic.

Elasticity of Demand

Elastic demand occurs when a small price change leads to a significant change in quantity demanded, often seen in luxury goods and items with close substitutes.
Inelastic demand means that quantity demanded changes little despite a large price change, typical for necessities and goods with few substitutes.
Unit elastic demand indicates that price changes result in proportional quantity demanded changes.
Key determinants of elasticity:
- Higher income levels can lead to more elastic demand.
- Availability of substitutes increases demand elasticity.
- Demand may be more inelastic in the short term and become more elastic over the long term as consumers adjust.
- Luxury goods have more elastic demand compared to necessities.

Resources

Resources are inputs essential for production and fall into four categories:
- Land: Includes natural resources like minerals, forests, and water.
- Labor: Represents human effort and skills used in production.
- Capital: Comprises manufactured assets like machinery, equipment, and buildings.
- Entrepreneurship: Encompasses the ability to innovate, combine resources, and undertake risks.
Scarcity refers to the limited nature of resources in relation to the infinite wants of individuals and societies, necessitating resource allocation decisions.

Law of Demand

As the price of a good decreases, the quantity demanded increases; as price increases, quantity demanded decreases.
Inverse relationship illustrated through a downward sloping demand curve.
Demand curve visually represents consumer behavior in relation to price changes.

Market Demand

Represents the total quantity of a good or service demanded by all consumers at various price levels.
Calculated by summing individual consumer demands for each price point.
Influenced by several factors:
- Consumer Preferences: Trends and tastes affecting demand.
- Income Levels: Higher income typically increases demand for normal goods.
- Prices of Related Goods: Substitute goods affect each other’s demand; if one increases, demand for the other may rise.
- Future Price Expectations: Anticipated price increases may lead to higher current demand.

Demand Elasticity

Reflects responsiveness of quantity demanded to price changes.
Price Elasticity of Demand: Ratio of percentage change in quantity demanded to percentage change in price.
Classifications:
- Elastic Demand (>1): Indicates consumers are highly responsive to price changes; large change in quantity demanded for small price adjustments.
- Inelastic Demand (<1): Indicates consumers are less responsive; quantity demanded changes little with price adjustments.

Description

This quiz explores the fundamental concepts of demand, including how price and consumer income influence purchasing decisions. Understand the law of demand and the factors affecting consumers' willingness to buy goods and services. Test your knowledge and see how well you grasp these economic principles.