Market Demand

Deriving the demand Curve

1. Theory'of'Market'Demand'
EdExcel'Economics'1.2.2'

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'

3. 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'

4. 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'

5. 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'W'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'

6. 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?'

7. 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'4
th
'unit'where'MU'falls'to'12'
• The'8
th
'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'

8. The'Paradox'of'Value'
• The'Paradox'of'Value'is'also'known'as'the'diamondWwater'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'

9. 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'
80W90%'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'

10. Seasonal'and'NonUSeasonal'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'value'in'million'euros'
NonWseasonal'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.'

11. 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'offWpeak':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'
Occupancy'rate'(per'cent)'
2011'2012'2013'2014'2015'

12. 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'
WhatsApp'
Facebook'Messenger'
WeChat'
Skype*'
Viber*'
LINE'
Kik*'
BlackBerry'Messenger'
KakaoTalk'
Monthly'ac:ve'users'in'millions'
*'July'2015'data'

13. 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'interW
rela:onships'between'markets.'Many'ques:ons'consider'two'or'more'markets.'

14. Composite'Demand'
• Composite'demand'exists'
where'goods'have'more'than'
one'use'W'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'

15. 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'

16. 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'consump: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?'

17. Market'Demand:'Global'Sales'of'Wearable'Devices'
0'
20'
40'
60'
80'
100'
120'
140'
160'
2013' 2014' 2015'
Shipments'in'millions'
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?'

18. 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'

19. 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'respondents'
Bought'DVD/BluWray' 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.'

20. Theory'of'Market'Demand'
EdExcel'Economics'1.2.2'