SECTION 2

The allocation
of resources

5 Microeconomics and macroeconomics

6 The role of markets in allocating resources 11 Price elasticity of demand
7 Demand 12 Price elasticity of supply
8 Supply 13 Market economic system
9 Price determination 14 Market failure
10 Price changes 15 Mixed economic system
Demand

Black playing cards The number on the The goal is to strike a

are buyers. card is the willingness deal with a seller for
to pay for an item. less than their
willingness to pay

The goal is to sell the

Red playing cards are The number on their
item for more than
sellers. card is the cost.
their cost
Demand

Demand is the quantity of a product that

consumers want to buy.
Demand

Individual and Market Demand

Individual demand is the demand of just one consumer Market demand is the
total demand for a product from all of its consumers
Demand

Demand is the quantity of a product that

consumers want to buy.
Demand

Discussion
1.What is the shape of the line and which way does it slope?
2.What is the simple explanation for this?
Demand

Price and the ‘Law of Demand’

The Law of Demand states: ‘As the price of a product falls, the quantity demanded will usually increase’
Demand
Effective Demand
The word ‘effective’ means that people must actually have the money to make the purchases.

e.g. we could all claim to demand a Porsche at $80,000.

But, how many of us actually have that amount of money?
Demand

MOVEMENTS ALONG THE DEMAND CURVE

Demand
When price changes….
Movements along the demand curve are caused by a change in price of that good.
This is called a contraction or an extension of demand.

Movements along the demand curve

Demand

OTHER FACTORS AFFECTING DEMAND

Task In groups….. You are going to be given some goods/services to consider.

• What factors (other than price) might change the weekly market demand for these products
Demand

OTHER FACTORS AFFECTING DEMAND

Task In groups….. You are going to be given some goods/services to consider.

What factors might change the demand for these products?

• Nintendo Wii, Magnum Ice cream, Zimmer Frames
• Gym Membership, Butter Batiste, Dry Shampoo
Demand

OTHER FACTORS AFFECTING DEMAND

Task In groups….. You are going to be given some goods/services to consider.

What factors might change the demand for these products?

• Nintendo Wii, Magnum Ice cream, Zimmer Frames
• Gym Membership, Butter Batiste, Dry Shampoo
• Chicken, Unleaded Petrol, Pizza Hut Pizza
Demand

OTHER FACTORS AFFECTING DEMAND

Task In groups….. You are going to be given some goods/services to consider.

What factors might change the demand for these products?

• Nintendo Wii, Magnum Ice cream, Zimmer Frames
• Gym Membership, Butter Batiste, Dry Shampoo
• Chicken, Unleaded Petrol, Pizza Hut Pizza
• Cadbury Dairy Milk, Umbrellas. Bus travel
Demand

Influences on Demand

• Price of other products (Substitutes and Complements)

• Tastes and Fashions
• Advertising and promotion
• Seasonal factors
• Government Interventions
• Weathe
• Consumers incomes
• Changes in the population
Demand
Demand refers to both the willingness and the ability of customers to pay a given
price to buy a good or service.

This is sometimes referred to as effective demand

to distinguish genuine demand from a desire to buy something.

The amount of a good or service demanded at each price level is called the
quantity demanded.

The quantity demanded falls as price rises,

while the quantity demanded rises at lower prices.
Hence, there is an inverse relationship between the price of a good or service and the quantity demanded.

This rule is known as the law of demand.

There are two reasons for this relationship:
» As the price of a good or service falls, the customer’s real income rises — that
is, with the same amount of income, the customer is able to buy more products
at lower prices.
» As the price of a good or service falls, a higher number of customers are able to
pay, so they are more likely to buy the product.
Demand

Activity

Choose an item that you can buy in your country.

1 What are the factors that affect the demand for this product?
2 Which factor is the most important? Why?
Produce your findings in an A4/one page poster/PPT format for displaying in the classroom.

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Demand
Determinants of demand

» Habits
» Substitutes and complements
» Advertising
» Government policies
» Economy
Demand

» Habits, fashions and tastes — changes in habits, fashions and tastes can
affect the demand for all types of goods and services. When products become
fashionable (such as smartphones) this leads to an increase in demand for
them, whereas those that become unfashionable (such as last season’s clothes)
have a reduced level of demand.
Income — higher levels of income mean that customers are able and willing to
buy more goods and services. For example, the average person in the USA will
have a higher level of demand for goods and services than the average person
in Vietnam or Turkey.
Demand

Substitutes and complements — substitutes are goods or services that can

be used instead of each other, such as Coca-Cola or Pepsi and tea or coffee. If
the price of one product falls, then it is likely the demand for its substitute will
also fall. Complements are products that are jointly demanded, such as tennis
balls and tennis racquets or cinema movies and popcorn. If the price of one
product increases, then the demand for its complement is likely to fall.
Demand

» Advertising — marketing messages are used to inform, remind and persuade

customers to buy a fi rm’s products. Companies such as McDonald’s, Apple and
Samsung spend hundreds of millions of dollars each year on their advertising
budgets in an attempt to increase the demand for their products.
Demand

» Government policies — rules and regulations such as the imposition of taxes

on tobacco and alcohol will affect the demand for certain products. Sales taxes
cause prices to increase, thereby reducing the level of demand. By contrast,
government subsidies for educational establishments and energy-effi cient car
makers help to encourage more demand for education and environmentally
friendly cars due to the relatively lower prices.
Demand

» Economy — the state of the economy (for example, whether it is in an

economic boom or a recession) has a huge impact on the spending patterns
of the population. The global fi nancial crisis of 2008, for example, caused the
demand for most goods and services around the world to decline as households
and businesses lacked confi dence in the economy. By 2013, the fi nancial crisis
had caused unemployment to exceed 26 per cent in both Greece and Spain —
the highest unemployment fi gures ever experienced in the European Union.
This undoubtedly reduced the level of demand for goods and services in these
countries.
Demand
Demand
Demand
Demand
Demand

Influences on Demand

• Price of other products (Substitutes and Complements)

• Tastes and Fashions
• Advertising and promotion
• Seasonal factors
• Government Interventions
• Weathe
• Consumers incomes
• Changes in the population
Demand

THE PRICE OF OTHER PRODUCTS

The price of other products

The effect of a price change on product x or a price change in product y will
depend on whether product y is: Unrelated A substitute A complement

Substitutes

Substitute products compete for demand as they can be used in place of each other
These products can be competitor products or other products that fulfill the same needs

Complements
Complements are products that are joint in demand as they are related products
Demand
Demand
Demand
Demand
Demand
Demand
Demand

Using an appropriate demand diagram, explain the impact on the demand for Apple
smartphones in the following cases.
1 An increase in the price of Apple smartphones.
2 An increase in the price of Samsung smartphones.
3 An increase in consumer incomes.
4 A successful advertising campaign promoting Samsung’s latest smartphones.
Demand
Price and demand
Diagrammatically, the demand curve is shown as a downward-sloping curve to
indicate the inverse relationship between price and quantity demanded (see
Figure 7.1).
Demand
Movements along a demand curve

A change in the price of a good or service causes a movement along the demand
curve. A price rise will cause a contraction in demand for the product — that is,
the quantity demanded falls. By contrast, a reduction in price will cause an
extension in the quantity demanded, as shown in Figure 7.2.
Demand
Individual demand and market demand

The market demand refers to the aggregation of all individual demand for a product.
It is found by adding up all individual demand at each price level (see
Figure 7.3).
For instance, suppose that a cinema charges $10 for its movie tickets
and the demand from male customers totals 500 per week while 400 females
purchase tickets at that price per week.
The market demand for cinema tickets at $10 per ticket is therefore 900 tickets per week.
Demand

Conditions of demand
Demand
Conditions of demand

While a movement in demand is caused by price changes only,

a change in all other (non-price) factors that affect demand, such as income, will cause a shift in demand.
An increase in demand (rather than an increase in the quantity demanded) is represented by a rightward shift
in the demand curve from D1 to D3 in Figure 7.4. For example, BMW recorded higher than expected profits in
2017 due to increasing demand for its cars in Europe, the USA and Asia. Hence, the demand
for BMW’s cars was higher at all price levels. In Figure 7.4, when the demand
curve shifts from D1 to D3 at a price of P1 the quantity demanded increases from
Q1 to Q3.
By contrast, a decrease in demand (rather than a fall in the quantity
demanded) is shown by shifting the demand curve to the left, from D1 to
D2 in Figure 7.4, resulting in less quantity demanded at all price levels.
At the price of P1, demand falls from Q1 to Q2.
For example, financial problems and rising
unemployment in the economy will decrease the demand for cars.
Demand

Activity
France is the most visited tourist country in the world, with over 80 million visitors each
year; the USA is second with 63 million visitors.
1 Investigate the most popular tourist cities in Europe.
2 Using demand theory, explain the factors that make these cities so popular.
Demand

1 What is meant by demand?

2 What is the law of demand?
3 What are the two reasons for the inverse relationship between price and quantity
demanded?
4 What are the main determinants of demand?
5 How does a movement along a demand curve differ from a shift in the demand
curve?
6 How does a contraction in demand differ from an extension in demand?
7 What is meant by market demand?
8 How does a fall in quantity demanded differ from a fall in demand?