market demand
TRANSCRIPT
Theory of Market Demand
EdExcel Economics 1.2.2
Demand for Goods and Services
• Defini8on of demand: • Demand for a good or service is the
quan:ty that purchasers are willing and able to buy at a given price in a given period of :me.
• Effec8ve demand: • Only if demand for a product is backed
up by a willingness and ability to pay the market price does demand becomes effec:ve or realized or actual.
• The basic law of demand is that demand varies inversely with price – lower prices make products more affordable for consumers.
Effec:ve demand is backed up with an
ability to pay
Poten:al (latent) demand is not yet expressed in the
market
The Demand Curve: Price & Quan8ty Demanded
Price of Coffee
Quan:ty demanded of coffee
Demand for Coffee
P1
Q1
P2
Q2
P3
Q3
A higher price leads to a contrac8on of quan:ty demanded
A lower price leads to an expansion of quan:ty demanded
Only changes in market price cause a movement along the demand curve
Income and Subs8tu8on Effects of a Price Change
Income effect
• A fall in price increases the real purchasing power of consumers
• This allows people to buy more with a given budget
• For normal goods, demand rises with an increase in real income
Subs:tu:on effect
• A fall in the price of good X makes it rela:vely cheaper compared to subs:tutes
• Some consumers will switch to good X leading to higher demand
• Much depends on whether products are close subs:tutes
Causes of ShiHs in the Demand Curve
1. Changing prices of a subs8tute goods or services in compe88ve demand 2. Changing price of a complements – i.e. products in joint demand 3. Changes in the real income of consumers
– When real income goes up, our ability to purchase goods and services increases, and this causes an outward shiT in the demand curve.
– But when incomes fall there will be a decrease in demand, except for inferior goods
4. Changes in the distribu:on of income -‐ a more equal distribu:on of income can increase total demand because rela:vely poorer consumers spend a higher propor:on of their income
5. The effects of adver8sing and marke8ng 6. Interest rates and demand (e.g. affec:ng the cost of credit) 7. Changes in the size and age structure of a popula8on 8. Seasonal factors for some goods and services 9. Social and emo8onal factors
The Concept of U8lity
• U:lity is a measure of the sa:sfac:on that we get from purchasing and consuming a good or service
• Total u:lity: – The total sa:sfac:on from a
given level of consump:on
• Marginal u:lity – The change in sa:sfac:on from
consuming an extra unit
• Standard economic theory believes in the idea of diminishing returns i.e. the marginal u:lity of extra units declines as more is consumed
U:lity is a measure of sa:sfac:on
Does the u:lity we get affect our
willingness to pay?
Diminishing Marginal U8lity and Demand Curve
• Marginal u:lity is the change in total sa:sfac:on from consuming an extra unit of a good or service
• Beyond a certain point, marginal u:lity may start to fall (diminish)
• In our example, this happens with the 4th unit where MU falls to 12
• The 8th unit carries zero marginal u:lity i.e. total u:lity stays the same
• If marginal u:lity is falling, then consumers will only be prepared to pay a lower price
• This helps to explain the downward sloping demand curve
Quan8ty Consumed
Total U8lity (TU)
Marginal U8lity (MU)
1 10 10
2 24 14
3 40 16
4 52 12
5 61 9
6 68 7
7 72 4
8 72 0
The Paradox of Value
• The Paradox of Value is also known as the diamond-‐water paradox • We understand that water is necessary to sustain life and that ornaments such
as diamonds are just that – certainly life sustaining. • But water typically has a low price, while a piece of diamond jewelry has a a
high market price. • One reason – water is abundant rela:ve to demand whereas diamonds are
scarce rela:ve to demand • Value in use i.e. drinking water to sa:sfy your thirst • Value in exchange – what a resource can be sold for in exchange for other
products. Nothing is more useful than water: but it will purchase scarce any thing. The reverse is usually true for expensive jewelry
Cheap water Expensive jewelry
Seasonal Demand for Goods and Services
• Seasonality refers to fluctua:ons in output and sales related to the seasonal of the year.
• For most products there will be seasonal peaks and troughs in produc:on and/or sales
• Demand for slippers peaks in the run up to Christmas
• Demand for plants at garden centres is linked to the plan:ng season
• There is high demand for decora:ng materials before the Easter weekend
• High street retailers such as jewellry companies may sell as much as 80-‐90% of their products over Xmas
• Theatres take a high % of their income during pantomime season
Easter chocolate
Summer fruits
Winter clothing
Ski season products
Some examples of seasonal demand
Seasonal and Non-‐Seasonal Demand for Confec8onery
5,219 5,243 5,353 5,375 5,136
580 563 583 612 669
0
1000
2000
3000
4000
5000
6000
7000
12 months ending 2 October 2011
12 months ending 1 October 2012
12 months ending 29 September 2013
12 month ending 29 December 2013
12 month ending 28 December 2014
Sales v
alue
in m
illion eu
ros
Non-‐seasonal confec:onery Seasonal confec:onery
Just over one tenth of total spending on confec:onery in the UK is es:mated to be seasonal spending e.g. at Easter and at Christmas.
Seasonal Demand: Occupancy Rate of Hotels in USA
The occupancy rate of hotels follows a season pajern reaching a peak during the summer months. At off-‐peak :mes, the occupancy rate can decline to less than 50% i.e. there is plenty of spare capacity
40.0%
45.0%
50.0%
55.0%
60.0%
65.0%
70.0%
75.0%
80.0%
Jan Feb March April May June July Aug Sep Oct Nov Dec
Occup
ancy ra
te (p
er cen
t)
2011 2012 2013 2014 2015
Networks and Demand Choices
Increasingly in the digital economy, the choices made by consumers are influenced by the decisions of others. A good example is the decision about which messenger app to use.
800
700
549
300
249
211
200
91
48
0 100 200 300 400 500 600 700 800 900
Facebook Messenger
Skype*
Viber*
LINE
Kik*
BlackBerry Messenger
KakaoTalk
Monthly ac:ve users in millions
* July 2015 data
Derived Demand
• Derived demand is the demand for a factor of produc8on used to produce another good or service
• Steel: The demand for steel is strongly linked to the market demand for cars and the construc:on of new buildings.
• Wood: Wood is a product where much of the demand comes from the uses to which it can be put. – The end use of wood in the UK is: Construc:on: 60%, Furniture: 15%, Packaging: 15%, Fencing: 7%, Other: 3%
• Labour: In factor markets, the demand for labour is derived • Transport: An increase in the demand for air travel will lead to a
rise in the demand for airplane pilots.
The idea of derived demand is important to use when discussing inter-‐rela:onships between markets. Many ques:ons consider two or more markets.
Composite Demand
• Composite demand exists where goods have more than one use -‐ an increase in the demand for one product leads to a fall in supply of the other
• An example is milk which can be used for cheese, yoghurts, cream, bujer and other products including fer:lizer!
• Another example is land – e.g. farmland can be developed in many different ways, urban land has different uses etc.
• Oil is used in many different industries such as plas:cs.
Bujer Yoghurt
Milk Chocolate Cheese
Unprocessed milk has many final uses
Illustra8ng ShiHs in the Demand Curve
Price of Coffee
Quan:ty demanded of coffee
D1
P1
Q1 Q2
D2 D3
Q3
D1 to D3 is an inward shiH of demand – less is demanded at each market price
D1 to D2 is an outward shiH of demand – more is demanded at each market price
Changes in price do not cause shiTs in the demand curve for a product
Consump8on of sports and energy drinks in UK
5.7 6.5
8.6 9 10
11.2 11.3 11.8 12.1
0
2
4
6
8
10
12
14
2006 2007 2008 2009 2010 2011 2012 2013 2014
Average consum
p:on
in litres per person
Which demand factors might help to explain the rising trend of consump:on and sports and energy drinks in the UK?
Market Demand: Global Sales of Wearable Devices
0
20
40
60
80
100
120
140
160
2013 2014 2015
Shipmen
ts in m
illions
Wearable cameras Smart glasses Smart watches
Healthcare Sports/ac:vity trackers Wearable 3D mo:on trackers
Smart clothing
Global market demand for wearable devices is soaring – to what extent are social factors more important than factors such as income?
The Fall and Rise of Vinyl Album Sales in the UK
In 2014, over 1.2 million vinyl LPs were sold in the UK, up from just 205 thousand sold in 2007. What might explain this rebound?
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
LPs sold
Changing Preferences – Movie Consump8on in the UK
0.0% 5.0%
10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%
Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015
Share of re
spon
dents
Bought DVD/Blu-‐ray Any digital
Paid official digital (DTO/VOD) Unofficial digital (pirate)
The pajern of demand for movies is changing! Digital sales now account for 20% of sales and the share from physical sales is falling.
Theory of Market Demand
EdExcel Economics 1.2.2