ECO 202 Exam summary notes
Demand is the correlation between a product's price and the amount that consumers are willing
and able to purchase. The Demand Law The quantity requested and the price are inversely
connected (Ceteris Paribus). As the price rises, the quantity demanded falls, and vice versa. P = a
- bQd, Demand Equation and Graph (Negative slope) Where,- P = PriceQd = Demanded
Quantity Demand Graph:
Price changes are represented by shifts along the same demand curve, which is referred to as a
change in quantity demanded. Consumers buy more when a product is less expensive, which is
reflected in an increase in the amount required. As a result, as the price drops from P1 to P2, the
quantity required rises from Q1 to Q2, which is recorded as a shift from point A to point B along
the demand curve (as seen in the figure above). When a product's price rises, buyers buy less of
it, which is reflected in a drop in the amount requested. This results in a drop in quantity required
from Q2 to Q1 when price rises from P2 to P1, which is expressed as a shift up the demand curve
from point B to point A. (as seen in the figure above).
Individual Demand versus Market Demand The demand curve for each individual customer of a
product exists. By adding the quantity desired by all consumers over all conceivable prices, the
market demand curve for the commodity is derived. This process is referred to as horizontal
summation.
The market demand curve is similarly downward sloping, but it is flatter than the individual
demand curves since the individual demand curves are downward sloping. Determinants of
Demand 1) Consumers' income When a consumer's income rises, their response in making a
purchase will depend on whether they view the product as an ordinary good or an inferior one. A
typical good is one that people are willing and able to purchase in greater quantities at each price
point as their income rises. - Rightward shift in the demand curve (Income increases for normal
good)
When a consumer's income rises, they tend to buy fewer units of the inferior commodity. They
also tend to buy less of the inferior goods at each price. - Leftward shift in the demand curve
(Income increases for inferior goods).
Because they have the option to move to a better product or a product of greater status,
consumers tend to buy less of an inferior thing when their income is higher. When their money
rises, customers could start taking fewer bus journeys and more cab rides, for instance. 2) The
cost of the associated commodities in consumption. Two products might be related in
consumption in one of two ways: as complements or as replacements. - Increasing the price of
one product (let's say Good A) causes consumers to purchase more of Good B. (say Good B). -
E.g. Customers who first bought biscuits may switch to buying bread if biscuit prices rise.
Although the price of bread has not changed, more people are purchasing it now, therefore the
entire demand curve for bread will move right.
Consuming complementary foods requires that they be consumed simultaneously. Tennis rackets
and tennis balls are complementary items that consumers need one without the other to utilize
effectively. Consumers will purchase more tennis rackets if the price of a tennis racket drops.
Because of this, there is a rise in the demand for tennis rackets. Given that the tennis racket and
tennis ball must be used in tandem, when more tennis rackets are purchased by consumers, they
must also purchase more tennis balls, even while the tennis ball's price remains the same, shifting
the overall demand curve to the right. 3) Tastes and inclinations These are the consumer's likes
and dislikes. If customers develop a greater liking for a product, they will even spend more
money on it.
