Introduction to Demand

Introduction to Demand

1. Demand is the number of units of goods a consumer will buy at various prices

2. The Law of Demand states that an increase in price leads to a decrease in quantity demanded or a decrease in price leads to an increase in quantity demanded

3. Other Types of Demand

   • Effective Demand
     • Consumers must be willing to buy and be capable of paying the price set by the supplier. It is demand backed by the necessary purchasing power.
   • Derived Demand
     • Derived demand occurs when one commodity is an essential part of another commodity and it is demanded not for its own sake. e.g. steel and cars.
   • Composite Demand
     • Composite demand occurs when a commodity is required for a number of different uses. e.g. sugar
   • Joint Demand
     • Joint demand occurs when the demand for one commodity is joined with the demand for another. Also called complementary goods. e.g. petrol and cars.

4. Movement or a Shift in a Demand Curve

   • A shift in the demand curve is caused by a change in any non-price determinant of demand
   • A movement in the demand curve is caused by a change in the price of the good itself

5. Factors Affecting the Demand For a Good

   • Its own price
   • Price of other Goods
     • Substitute goods
     • Complementary Goods
   • Level of Income
     • A rise in income causes more normal goods to be demanded, while a fall in income leads to more inferior goods to be demanded.
   • Consumer Expectations
   • Consumer Tastes
   • Unplanned Factors
     • e.g. if there is a sudden heat wave, there would be an increase in the quantity demanded for sunscreen.
   • Government Regulations
     • e.g. the plastic bad levy is aimed to reduce consumption of plastic bags. The smoking ban is aimed at curtailing tobacco consumption

6. Exceptions to the Law of Demand

   • Giffen Goods
     • Giffen Goods are goods with a positive price effect, i.e. more is bought as the price rises and less is bought as price falls
     • Bread, rice and potatoes
   • Snob Items
     • Some commodities are attractive to some buyers because of their exclusiveness or high price. A rise in price makes them more exclusive.
     • Yachts, sport cars and designer clothes
   • Speculative Goods
     • e.g. if a person is considering buying stocks and shares, the possibility that prices are likely to be even higher in the future will stimulate and probably increase quantity demanded at current prices
   • Addictive Goods
     • Even when the price of the commodity increases, they will probably continue to purchase these goods and their demand for the commodity may actually increase because of their addiction.

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