Topic 2

6 Market Demand
 Objectives…

• Define demand
• Explain the factors that affect quantity
demanded (QD)
• Understand income and substitution effects
• Understand shifts along and of the demand
curve
• Understand types of demand
• Explain utility
 What is demand?

What is effective demand?

 We make 2 assumptions (we often do in

economics!!) when analysing situations

1. Consumers are rational. They will make
decisions that maximise their economic
welfare. If we apply this logic to the market,
then all consumers in the market act logically
2. Other things remaining equal (ceteris
paribus’). This assumption is needed to
enable economists to recognise the impact of
each individual factor.
The Demand Curve: Price & Quantity Demanded
Price of Only changes in market price cause a
Coffee movement along the demand curve

P2
A higher price leads to a
contraction of quantity demanded

P1
A lower price leads to an expansion
of quantity demanded

P3

Demand for Coffee

Q2 Q1 Q3 Quantity demanded
of coffee
 Illustrating Shifts in the Demand Curve

Price of
Coffee

P1

D3 D1 D2

Changes in price do not cause shifts inQ3

the Q1 Q2 Quantity demanded
demand curve for a product of coffee
 So what factors do you think
influence quantity demanded
(QD)?
What is it and how does it
influence demand?
 Factor 1 -
• The law of demand states that as the P______ of a
good R_____, quantity demanded F_____, and as the
P________ of the good F_____, the quantity
demanded R______.

• The more units of a product that a consumer buys,

the less satisfaction each additional unit provides for
the consumer. A rational consumer will only buy a
product if the amount of satisfaction it gives is equal
to or greater than the price charged.
 The Concept of Utility
• Utility is a measure of the
satisfaction that we get from
purchasing and consuming a good or
service
• Total utility:
Utility is a measure
of satisfaction

• Marginal utility

• Standard economic theory believes

in the idea of diminishing returns i.e. Does the utility we
the marginal utility of extra units get affect our
declines as more is consumed willingness to pay?
 Diminishing Marginal Utility and the Demand Curve
• Marginal utility is the change in Quantity Total Utility Marginal
total satisfaction from consuming Consumed (TU) Utility (MU)
an extra unit of a good or service 1 10 10
• Beyond a certain point, marginal
utility may start to fall (diminish) 2 24 14
• In our example, this happens with
3 40 16
the 4th unit where MU falls to 12
• The 8th unit carries zero marginal 4 52 12
utility i.e. total utility stays the
same 5 61 9

• If marginal utility is falling, then 6 68 7

consumers will only be prepared
to pay a lower price 7 72 4
• This helps to explain the
8 72 0
downward sloping demand curve
 Something to think about…The Paradox of Value

Cheap water Expensive jewelry

• 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 relative to demand whereas diamonds are
scarce relative to demand
• Value in use i.e. drinking water to satisfy 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
 Factor 2 –

• A person’s income is usually based on the

number of hours worked or in the form of an
annual salary. Income is considered a flow of
earnings paid to labour over a period of time
• Demand is based on a willingness and an
ability to pay (effective demand). We look at
household income rather than individual
incomes. Why?
• We also look at disposable income…what’s
this???
 Luxury products
 Standard mid range products (normal goods)
 Inferior goods
Thinking point…what about the distribution of
income? Equal v unequal?
 Homework -

1. More on the influence of income on QD…

Milton Friedman took the view that current income
is not the major influence on demand. His theory is
based around the ‘permanent income hypothesis’
Research and summarise this.
2. Research and note down e.g.s of derived
demand and composite demand
Due next lesson!
 Factor 3 -

• Wealth includes cash, bank deposits and

ownership of company shares or household goods
(furniture, appliances, cars, property etc)
• Can be inherited or through accumulation
• Wealth is a stock of assets owned by an individual
or organisation
• Liquid assets are better than illiquid assets
• In the UK the distribution of wealth is more
unequal than the distribution of income
 Factor 4 –

 Can you think of any substitute products?

Substitutes are goods or services that can

replace each other
A R_____ in the price of a product leads to an
I___________ in the demand for a S__________
product. A F______ in the price of a product
leads to a D__________ in the demand for a
S___________ of that product
 Income and Substitution Effects of a Price Change

• A fall in price increases • A fall in the price of

the real purchasing good X makes it
power of consumers relatively cheaper
• This allows people to compared to substitutes
buy more with a given • Some consumers will
budget switch to good X leading
• For normal goods, to higher demand
demand rises with an • Much depends on
increase in real income whether products are
close substitutes
 Factor 5 –

• Complementary goods/services are those that are

used alongside each other…can you think of any?

• A R_______ in the price of a product leads to a

D__________ in the demand for a
C_________________ of that product. A F_____
in the price of a product leads to an I_________ in
the demand for a C_____________ of that
product.
 Factor 6 –
• These are factors specific to individual consumers, which affect
the demand of Individuals and thus affect market demand. They
are often referred to as ‘tastes’.
• Factors include:
 Social and emotional reasons
 Personal likes and dislikes
 Medical factors
 Quality or value for money
 Design features
 The environment
 demographics
Social & Emotional Factors Influencing Demand
 An example - Networks and Demand Choices
0 100 200 300 400 500 600 700 800 900
WhatsApp 800

Facebook Messenger 700

WeChat 549

Skype* 300

Viber* 249

LINE 211

Kik* 200

BlackBerry Messenger 91

KakaoTalk 48

Monthly active users in millions * July 2015 data

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. Which do you use and
why?
 Consumption of sports and energy drinks in UK
14

11.8 12.1
Average consumption in litres per person

12 11.2 11.3
10
10
9
8.6
8
6.5
6 5.7

0
2006 2007 2008 2009 2010 2011 2012 2013 2014

Which demand factors might help to explain the rising trend of

consumption and sports and energy drinks in the UK?
 Market Demand: Global Sales of Wearable Devices
Wearable cameras Smart glasses Smart watches
Healthcare Sports/activity trackers Wearable 3D motion trackers
Smart clothing
160

140

120
Shipments in millions

100

80

60

40

20

0
2013 2014 2015

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
1600000

1400000

1200000

1000000
LPs sold

800000

600000

400000

200000

0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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?
Changing Preferences – Movie Consumption in the UK
Bought DVD/Blu-ray Any digital
Paid official digital (DTO/VOD) Unofficial digital (pirate)
45.0%
40.0%
35.0%
Share of respondents

30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015

The pattern of demand for movies is changing! Digital sales now

account for 20% of sales and the share from physical sales is falling.
Why do you think this is happening?
 Factor 7 -
• Refers to fluctuations in output and
Some examples of seasonal demand
sales related to the seasonal of the
year.
• For most products there will be
seasonal peaks and troughs in
production and/or sales
• Demand for slippers peaks in the run
up to Christmas
• Demand for plants at garden centres
is linked to the planting season
• There is high demand for decorating
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
An example - Seasonal and Non-Seasonal Demand for
Confectionery
Non-seasonal confectionery Seasonal confectionery
7000

6000
580 563 583 612 669
5000 5,219 5,243 5,353 5,375
5,136
Sales value in million euros

4000

3000

2000

1000

0
12 months ending 12 months ending 12 months ending 12 month ending 12 month ending
2 October 2011 1 October 2012 29 September 29 December 2013 28 December 2014
2013

Just over one tenth of total spending on confectionery in the UK is

estimated to be seasonal spending e.g. at Easter and at Christmas.
Another example - Seasonal Demand: Occupancy Rate
of Hotels in USA
2011 2012 2013 2014 2015
80.0%

75.0%

70.0%
Occupancy rate (per cent)

65.0%

60.0%

55.0%

50.0%

45.0%

40.0%
Jan Feb March April May June July Aug Sep Oct Nov Dec

The occupancy rate of hotels follows a season pattern reaching a peak

during the summer months. At off-peak times, the occupancy rate can
decline to less than 50% i.e. there is plenty of spare capacity
A recap - Causes of Shifts in the Demand Curve