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Unit 1 Micro: Theory of Market Demand
Geoff Riley
9th May 2014
Demand is the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period
Key Demand Concepts:
| Asking price | The price at which a security, commodity or currency is offered for sale on the market - generally the lowest price the seller will accept |
| Ceteris paribus | To simplify analysis, economists isolate the relationship between two variables by assuming ceteris paribus - all other influencing factors are held constant |
| Complements | Two complements are said to be in joint demand |
| Composite demand | Where goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. E.g. milk which can be used for cheese, yoghurts, cream, butter and other products. If more milk is used for manufacturing cheese, ceteris paribus there is less available for butter |
| Conspicuous consumption | Conspicuous consumption is consumption designed to impress others rather than something that is wanted for its own sake |
| Consumer surplus | Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price) |
| Cyclical demand | Demand that change in a regular way over time depending on the part of the economic (business) cycle that a country is in or the time of year |
| Demand | Quantity of a good or service that consumers are willing and able to buy at a given price in a given time period |
| Demand curve | A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price falls |
| Derived demand | Derived demand occurs when the demand for a particular product depends on the demand for another product or activity |
| Effective demand | Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand |
| Excess demand | The difference between the quantity supplied and the higher quantity demanded when price is set below the equilibrium price. This will result in queuing and an upward pressure on price |
| Latent demand | Latent demand exists when there is willingness to purchase a good or service, but where the consumer lacks the purchasing power to be able to afford the product |
| Law of demand | The law of demand is that there is an inverse relationship between the price of a good and demand |
| Normal goods | Normal goods have a positive income elasticity of demand. Necessities have an income elasticity of demand of between 0 and +1. Luxuries have income elasticity > +1 demand rises more than proportionate to a change in income |
| Perverse demand curve | A perverse demand curve is one which slopes upwards from left to right. Therefore an increase in price leads to an increase in demand. This may happen where goods are strongly affected by price expectations or in the case of Giffen goods |
| Substitutes | Goods in competitive demand and act as replacements for another product |
Demand Revision Presentation
Now, test your understanding here with this revision quiz
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.