AS1 05 Demand Shift

8/14/2019 AS1 05 Demand Shift

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Advanced Subsidiary Economics

Markets: Theory of Demand(Lesson 05)

Dr Taimur RM Sharif


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


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


4/15

D1

Price

P

O Q0

Q1

Quantity

An increase in demand

D0


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


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.


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.


8/15

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.


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.


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?


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.


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.


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.


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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.


15/15

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Questions

THANK YOU

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Documents

AS1 05 Demand Shift