AS1 05 Demand Shift
-
Upload
dazzergunners -
Category
Documents
-
view
231 -
download
0
Transcript of AS1 05 Demand Shift
-
8/14/2019 AS1 05 Demand Shift
1/15
Advanced Subsidiary Economics
Markets: Theory of Demand(Lesson 05)
Dr Taimur RM Sharif
-
8/14/2019 AS1 05 Demand Shift
2/15
Content:
Demand Concept of and Factors influencing demand Movements along and shifts in demand curve
Learning objectives:
At the end of the lesson students should:
Understand the underlying features of demand and supply
Appreciate the difference between movements along and shifts inthe demand and supply curves
Explain the real life examples through graphical presentations
Teaching method:
Student activity and mind mapping Power point Use of tables and graphs
Case studies
-
8/14/2019 AS1 05 Demand Shift
3/15
Theory of Demand
Factors influencing Demand
The conditions of demand for a product in a market canbe summarised as follows:
D = f (Pn, PnPn-1, Y, T, P, E)Where:
Pn = Price of the good itself
PnPn-1 = Prices of other goods e.g. prices of
Substitutes and ComplementsY = Consumer incomes including both the leveland distribution of income
T = Tastes and preferences of consumers
P = The level and age-structure of the population
E = Price expectations of consumers
-
8/14/2019 AS1 05 Demand Shift
4/15
D1
Price
P
O Q0
Q1
Quantity
An increase in demand
D0
-
8/14/2019 AS1 05 Demand Shift
5/15
Theory of Demand
Factors Influencing Demand
tastes
number and price of substitute goods
number and price of complementary goods
income
distribution of income
expectations
Shifts in the demand curve
-
8/14/2019 AS1 05 Demand Shift
6/15
Theory of Demand
Changing prices of a substitute good
Substitutes are goods in competitive demandand act as replacements for another product.
Examples:
A rise in the price of Esso petrol should cause asubstitution effect away from Esso towards
competing brands.
A fall in the monthly rental charges of cablecompanies or Vodafone mobile phones mightcause a decrease in the demand for British
Telecom services.
-
8/14/2019 AS1 05 Demand Shift
7/15
Theory of Demand
Changing price of a complement
Two complements are said to be in joint demand
Examples:
An increase in the cost of flights from LondonHeathrow to New York would cause a decreasein the demand for hotel rooms in New York andalso a fall in the demand for taxi services both inLondon and New York.
A reduction in the market price of computersshould lead to an increase in the demand for
printers, scanners and software applications.
-
8/14/2019 AS1 05 Demand Shift
8/15
Theory of Demand
Change in the income of consumers
Most of the things we buy are normal goods.
When an individuals income goes up, theirability to purchase goods and servicesincreases, and this causes an outward shift inthe demand curve.
When incomes fall there will be a decrease inthe demand for most goods.
-
8/14/2019 AS1 05 Demand Shift
9/15
Theory of Demand
Change in tastes and preferences
Changing tastes and preferences can have ahuge effect on demand.
Persuasive advertising is designed to cause achange in tastes and preferences and therebycreate an outward shift in demand.
A good example of this is the recent surge insales of smoothies and other fruit juice drinks.
-
8/14/2019 AS1 05 Demand Shift
10/15
Change in tastes and preferences
The market for health fruit and vegetable drinks has
grown rapidly in recent years following a change in
consumer preferences. How much are we
influenced by the effects of advertising?
-
8/14/2019 AS1 05 Demand Shift
11/15
Theory of Demand
Discretionary income
Discretionary income is disposable income lessessential payments like electricity & gas and,especially, mortgage repayments.
An increase in interest rates often means anincrease in monthly mortgage payments reducingdemand. And during 2005 and 2006 we have seena sharp rise in the cost of utility bills with a series of
hikes in the prices of gas and electricity. This haseaten into the discretionary incomes of millions ofhouseholds across the UK.
The Discretionary incomes of people suffering fromfuel poverty have become a major current issue.
-
8/14/2019 AS1 05 Demand Shift
12/15
Theory of Demand
Interest rates and demand
Many products are bought on credit usingborrowed money, thus the demand for them maybe sensitive to the rate of interest charged bythe lender. Therefore if the Bank of Englanddecides to raise interest rates the demand formany goods and services may fall.
Examples ofinterest sensitive products:
Household appliances, electronic goods, newfurniture, motor vehicles, etc.
The demand for housing is affected by changes
in mortgage interest rates.
-
8/14/2019 AS1 05 Demand Shift
13/15
Exceptions to the law of demand
Ostentatious consumption / Veblen Goods
Some goods are luxurious items where satisfactioncomes from knowing both its higher price and beingable to flaunt consumption of it to other people!
A higher price may be regarded as a reflection ofproduct quality and some consumers are preparedto pay this for the snob value effect.
Veblen Goods have a high-income elasticity of
demand (to be discussed in detail in related lesson).
Example:
VI - the worlds most exclusive perfume. Only 475
bottles @ price 47,500 each have been produced.
-
8/14/2019 AS1 05 Demand Shift
14/15
Exceptions to the law of demand
Speculative Demand
Potential buyers are interested not just in the
satisfaction they may get from consuming theproduct, but also the potential rise in market priceleading to a capitalgain or profit.
When prices are rising, speculative demand maygrow, adding to the upward pressure on prices.
The speculative demand for housing and for
shares would come into this category.
-
8/14/2019 AS1 05 Demand Shift
15/15
????
??
??
?? ???
??
???
??
Questions
THANK YOU
??