Theory of Market Demand

EdExcel Economics 1.2.2

Homework

• What is the snob effect?– Where people value goods more highly simply

because their price is high. There could be an upward sloping demand curve. E.g. Rolex Watches

• What is a normal good?– One where quantity demanded (QD) increases in

response to an increase in consumer incomes.• What is an inferior good?– One where the QD decreases in response to an

increase in consumer incomes.

Missing HW from last week (MCQs)

• Ronald• Ayo• Paul

Hand it in now

Write in your planner

• Folder check tomorrow P3 – Economics - Ms Haron

• We will be in this classroom – EN13

No homework today

• BUT you will be set an essay question tomorrow and you will have two weeks to answer it (enough time to put thought into it and write two pages of A4).

• It will be due on Tuesday 24th November

Demand for Goods and Services

• Definition of demand:• Demand for a good or service is the

quantity that purchasers are willing and able to buy at a given price in a given period of time.

• Effective demand: • Only if demand for a product is backed

up by a willingness and ability to pay the market price does demand becomes effective or realized or actual.

• The basic law of demand is that demand varies inversely with price – lower prices make products more affordable for consumers.

Effective demand is backed up with an

ability to pay

Potential (latent) demand is not yet expressed in the

market

The Demand Curve: Price & Quantity Demanded

Price of Coffee

Quantity demanded of coffee

Demand for Coffee

P1

Q1

P2

Q2

P3

Q3

A higher price leads to a contraction of quantity demanded

A lower price leads to an expansion of quantity demanded

Only changes in market price cause a movement along the demand curve

The Concept of Utility

• Utility is a measure of the satisfaction that we get from purchasing and consuming a good or service

• Total utility: – The total satisfaction from a

given level of consumption

• Marginal utility– The change in satisfaction from

consuming an extra unit

• Standard economic theory believes in the idea of diminishing returns i.e. the marginal utility of extra units declines as more is consumed

Utility is a measure of satisfaction

Does the utility we get affect our

willingness to pay?

Diminishing Marginal Utility and Demand Curve

• Marginal utility is the change in total satisfaction from consuming an extra unit of a good or service

• Beyond a certain point, marginal utility 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 utility i.e. total utility stays the same

• If marginal utility is falling, then consumers will only be prepared to pay a lower price

• This helps to explain the downward sloping demand curve

Quantity Consumed

Total Utility (TU)

Marginal Utility (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 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

Cheap water Expensive jewelry

Seasonal Demand for Goods and Services

• Seasonality refers to fluctuations in output and 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

Easter chocolate

Summer fruits

Winter clothing Ski season products

Some examples of seasonal demand

Seasonal and Non-Seasonal Demand for Confectionery

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

0

1000

2000

3000

4000

5000

6000

7000

5,219 5,243 5,353 5,3755,136

580 563 583 612 669

Non-seasonal confectionery Seasonal confectionery

Sale

s val

ue in

mill

ion

euro

s

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.

Seasonal Demand: Occupancy Rate of Hotels in USA

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

Jan Feb March April May June July Aug Sep Oct Nov Dec40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

2011 2012 2013 2014 2015

Occ

upan

cy ra

te (p

er c

ent)

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.

WhatsApp

Facebook Messenger

WeChat

Skype*

Viber*

LINE

Kik*

BlackBerry Messenger

KakaoTalk

0 100 200 300 400 500 600 700 800 900

800

700

549

300

249

211

200

91

48

Monthly active users in millions * July 2015 data

Consumption of sports and energy drinks in UK

2006 2007 2008 2009 2010 2011 2012 2013 20140

2

4

6

8

10

12

14

5.76.5

8.6 910

11.2 11.311.8 12.1

Aver

age

cons

umpti

on in

litr

es p

er p

erso

n

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

2013 2014 20150

20

40

60

80

100

120

140

160

Wearable cameras Smart glasses Smart watchesHealthcare Sports/activity trackers Wearable 3D motion trackersSmart clothing

Ship

men

ts in

mill

ions

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?

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

200000

400000

600000

800000

1000000

1200000

1400000

1600000

LPs

sold

Changing Preferences – Movie Consumption in the UK

Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 20150.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Bought DVD/Blu-ray Any digitalPaid official digital (DTO/VOD) Unofficial digital (pirate)

Shar

e of

resp

onde

nts

The pattern of demand for movies is changing! Digital sales now account for 20% of sales and the share from physical sales is falling.

The Demand Curve: Price & Quantity Demanded

Price of Coffee

Quantity demanded of coffee

Demand for Coffee

P1

Q1

P2

Q2

P3

Q3

Only changes in market price cause a movement along the demand curve

Illustrating Shifts in the Demand Curve

Price of Coffee

Quantity demanded of coffee

D1

P1

Q1 Q2

D2D3

Q3

D1 to D3 is an inward shift of demand – less is demanded at each market price

D1 to D2 is an outward shift of demand – more is demanded at each market price

Changes in price do not cause shifts in the demand curve for a product

No homework today

• BUT you will be set an essay question tomorrow and you will have two weeks to answer it (enough time to put thought into it and write two pages of A4).

• It will be due on Tuesday 24th November