The Determinants of the Demand for Goods and Services

The Determinants of the Demand for Goods and Services

1. DEMAND= the amount consumers are willing and able to buy at each given price level

   • EFFECTIVE DEMAND= demand supported by the ability to pay for a good or service
     • MARKET DEMAND= total demand in a market for a good, the sum of all individuals' demand, at each given price
       • NORMAL GOODS= good or services that will see an increase in demand when incomes rise
         • INFERIOR GOODS= goods or services that will see demand fall when income rises
           • COMPLEMENTARY PRODUCTS= goods that are consumed together, for example bacon and egg
             • COMPOSITE DEMAND= a good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the available supply for the other purpose, typically leasding to higher prices e.g. milk used in butter and cheese
               • DERIVED DEMAND= when demand for one good or service comes from the demand for another good or service. The demand for cars stimulates the demand for steel, therefore the demand for steel is derived demand

2. The Demand Curve

   • The demand curve shows the relationship between the price and the amount consumers intend to buy at each given price level
     • it is inversely proportional as the higher the price, the lower the quantity demand

3. Individual and Market demand

   • Each consumer may buy as much of a product as the deem as worth it at each given price level
     • Choices will vary from person to person depending on preferences and income
       • We can plot a demand curve based on satisfaction or utility they get from each unit of a product
         • To identify the market demand curve for a product or service we must calculate the sum of demand from all individuals together

4. Contractions and Extensions in Demand

   • When price rises, there is a contraction in demand
   • When price falls, there is an extension in demand
   • These are movements ALONG the demand curve
     • Caused by changes in price

5. Shifts in Demand

   • Caused by changes in the conditions of demand
   • Rightward shift of Demand
     • Causes (for normal goods)
       • Leftward shift of Demand
       • price of substitute good
         • price of a good in competitive demand
           • increases
           • price of a complementary good
             • decreases
             • personal disposable income
               • increase (unless it's an inferior good, e.g. bus travel)
               • advertising campaign is..
                 • successful
                 • unsuccessful
                 • population..
                   • decreases
                   • increases
               • decrease (unless it's an inferior good)
             • increases
           • decreases
         • increases
         • decreases

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