The theory of demand

AS Unit F581:AS Unit F581:Markets in actionMarkets in action

Competitive markets Competitive markets and how they workand how they work

The theory of The theory of demanddemand

Task: investigating Task: investigating marketsmarketsIn groups of three, you are going to investigate a range of markets to try to come up with reasons which might explain changes in market prices.

In each case you should:

describe how the market price is changing over time;

conduct some research into the market using the internet;

suggest reasons for the price changes you have described;

present your findings to the rest of the class.

Conclusions from Conclusions from investigating markets taskinvestigating markets task

Prices are determined by the interaction of the forces

of demand and supply.

Prices are determined by the interaction of the forces

of demand and supply.

If there is too much demand relative to supply,

prices will tend to rise.







If there is insufficient demand relative to

supply, prices will tend to fall.

If there is insufficient demand relative to

supply, prices will tend to fall.

DefinitionsDefinitions

Demandthe amount consumers are willing and able to buy at

different prices in a given time period

Demandthe amount consumers are willing and able to buy at

different prices in a given time period

Supplythe amount producers are

willing and able to offer for sale at different prices in a given

time period

Supplythe amount producers are

willing and able to offer for sale at different prices in a given

time period

Demand curves – Stage Demand curves – Stage 11

You have a maximum of £2.50 to spend and can buy any of the products below, in any combination.

You can buy any number of one product and do not have to buy all the products. You must spend all of your income.

When you have made your decisions, fill in the table on the worksheet.

50p 50p

50p 50p


Now assume that it is a new day and you have consumed all the food you bought yesterday.

A global shortage of peanuts has pushed the price of a Snickers bar up to £1

You still have £2.50 to spend. Make your decisions again.

£1 50p

50p 50p

Global peanut shortage

Untreated nuts to blame


Work out the quantities demanded by the whole class (the ‘market’) at each stage of the game and record them in the table below.

Product Quantities – Stage 1(Snickers = 50p)

Quantities – Stage 2(Snickers = £1)

Snickers bar

Coke

Milk

Mars bar

0

25

50

75

100

125

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

Quantity demanded

Pri

ce (

pen

ce)

The ‘law’ of demandceteris paribus, the lower the price the higher the quantity

demanded

The ‘law’ of demandceteris paribus, the lower the price the higher the quantity

demanded

Determinants of Determinants of demanddemand We can conclude at this point that there is an

inverse relationship between price and quantity demanded. But we need to remember that this is based on the ceteris paribus assumption – that is that all other things affecting demand have not changed when price changes.

If they do, then there will be a movement along the demand curve – there will either be a contraction of demand as price rises or an extension of demand as price falls.

Why the inverse Why the inverse relationship?relationship?

Income effectwhen the price of a good falls

consumers can maintain current consumption for less expenditure and

use their higher real income to buy more of the good (‘normal’ good)

Income effectwhen the price of a good falls

consumers can maintain current consumption for less expenditure and

use their higher real income to buy more of the good (‘normal’ good)

Substitution effectwhen the price of a good falls the product is now relatively cheaper

than alternatives so some consumers switch their spending from the

alternative goods to this product

Substitution effectwhen the price of a good falls the product is now relatively cheaper

than alternatives so some consumers switch their spending from the

alternative goods to this product

Determinants of Determinants of demanddemand

Demand curves SHIFT (left or right) when there is a change in

Income Price and availability of

substitutes Price of complementary

goods / services Population /

demographics / household type

Tastes and preferences Government policy /

legislation

Price (£)

Quantity demanded

Demand

D1

D2

Use you textbooks to create a set of notes on the theory of demand covered in lessons

Your notes should cover the following: the major determinants of demand the distinction between movement along a demand curve

and shifts of the demand curve the distinction between individual and market demand

curves the concept of consumer surplus and its illustration using

demand curves

Try to make your notes visually memorable by using colour and spacing. This topic lends itself well to a mind map format

Homework 1Homework 1

Homework 2Homework 2

Choose two of the determinants of demand.

For each determinant write about an example of a good or service where demand has changed as a result of change in the determinant.

Use your own knowledge of trends in markets you are familiar with to focus any internet research you do.

Keep it short and don’t copy and paste from websites – use your own words.

Homework 3Homework 3Tackle Questions 1 and 2 of the Data Question on p38 of your Anderton textbook.Technique tipsQuestion 1 (5 marks)- Compare the underlying / overall trend- Point out exceptions to the underlying / overall trend- Compare the % change over the whole period- Compare the rates of change within the overall time period

Question 2 (5 x 5 marks)- For each sub part there are diagram marks and explanation marks- For the diagrams, there are no marks available unless each diagram is fully and accurately labelled- In each case there are 2 marks for the diagrams - 1 for the original position and 1 for the new position (or shift)- There are 3 marks for explaining each diagram - simply say what you see and give a valid reason for the changes you have represented.

Total marks = 30

Research task Research task exampleexampleThe UK’s growing thirst for healthy eating and fears about the longer term health effects of the consumption of fast food has meant that the demand for smoothies and other fresh fruit drinks has expanded rapidly in recent years. Innocent, the leading brand in supermarkets, estimates that the market could be worth £170m in 2007. More and more retail outlets such as Crussh are appearing on the high streets, and demand is rising in school canteens and workplaces. Innocent has seen its turnover expand to £37m in the past six years and has over 50 per cent of the UK market. It sells 1m smoothies a week, compared with 20 on its first day of operation in 1999. Source: Adapted from news reports, June 2006 and the Innocent web site

Consumer surplusConsumer surplusWhen was the last time as a consumer that

you got a ‘bargain’?A ‘bargain’ is when you pay a price less

than the price you would be willing to pay In economics a ‘bargain’ is called consumer

surplusConsumer surplus is a measure of the

difference between what a consumer is willing to pay for a product and what they actually pay (the market price)

Illustrating Illustrating consumer surplusconsumer surplusPrice

Quantity demanded

Demand

Market price

1

£5

£10

£9

£6£7

£8

2 3 4 5 6

Consumer surplus – the difference between what the consumer is willing to pay and what they actually pay (the market price)

Price and Price and consumer surplusconsumer surplusPrice

Quantity demanded

Demand

Market price

Consumer surplus

P

Q

P1

Q1

New consumer surplus

Change in consumer surplus (reduction)

Investigation task 1Investigation task 1Go to the Virgin Trains website (

www.virgintrains.co.uk)Find out the different ticket categories and

prices for a one-way trip from Chester to London on 22 November departing at 9am

How might what you have observed relate to the concept of consumer surplus?

http://www.virgintrains.co.uk/

Follow up to Follow up to investigation task 1investigation task 1

Pri

ce

Sales

D=AR

Revenue = price (P) x ticket sales (Q)

P

Q

Additional revenue from having 2 ticket categories

Additional revenue from having 3 ticket categories

Investigation task 2Investigation task 2 Use the BBC website (www.bbc.co.uk) to find

out about the UK government’s auction of licences to operate 3G mobile phone licences in 2000

Try to find information on The number of firms bidding The number of licences available Start and finish bids Total amount paid for the licences

How might what you have found out relate to the concept of consumer surplus?

http://www.bbc.co.uk/

Follow up to Follow up to investigation task 1investigation task 1

Demand

Quantity demanded

Selling all five licences at the same price leads to revenue for the gov’t of the yellow box and consumer surplus to the telecommunications companies equal to the blue triangle

By auctioning the licences the gov’t hopes to sell each to the highest bidder. This potentially raises additional revenue of the red shaded rectangles

Price

Technology

The theory of demand