Notes for Chapter 7

Notes on Demand

1. Definition of Demand

• Effective Demand: When economists talk about demand, they mean effective
demand, which is the willingness and ability to buy a product.
• Key Point: Simply wanting a product is not enough; a person must also be able to
afford it for their demand to be considered effective. If someone cannot afford a
product, a firm will not sell it to them.

2. Demand and Price

• Inverse Relationship: Demand and price have an inverse relationship, meaning they
move in opposite directions.
• Price Increase: When the price of a product rises, demand for it usually falls
because:
o Fewer people can afford the product.
o People are less willing to buy it and may switch to cheaper alternatives.
• Price Decrease: When the price of a product falls, demand usually increases because
more people can afford it and are willing to buy it.

3. Individual and Market Demand

• Individual Demand: This is the amount of a product that a single person is willing
and able to buy at different prices.
• Market Demand: This is the total demand for a product at different prices, calculated
by adding up all individual demands. This process is called aggregation.
• Aggregation: The process of summing up the demand of all potential buyers to get
the market demand.

4. Demand Schedule

• A demand schedule is a table that lists the different quantities of a product demanded
at various prices over a specific time period.
Important Terms:

• Effective Demand: The combination of desire for a product and the financial ability
to purchase it.
• Inverse Relationship: A situation where one variable increases while the other
decreases.
• Individual Demand: The amount of a product one person is willing and able to buy
at different prices.
• Market Demand: The total demand for a product from all consumers at different
prices.
• Aggregation: The process of summing up individual demands to get market demand.
• Demand Schedule: A table showing the quantity demanded at different prices over a
certain period.

Summary:

• Demand is only considered effective if someone is both willing and able to buy a
product.
• As prices rise, demand typically falls, and as prices fall, demand usually rises.
• Individual demand refers to one person's demand, while market demand is the sum of
all individual demands.
• A demand schedule lists the quantity demanded at various prices, helping to
understand how demand changes with price.

Notes on Demand Curve

1. Definition of a Demand Curve:

 • A demand curve is a graphical representation that shows the relationship between the
price of a product and the quantity demanded. It typically slopes downward from left
to right, illustrating the inverse relationship between price and demand.

2. Shape of the Demand Curve:

• Downward Sloping: The demand curve slopes downward, meaning as the price of a
product decreases, the quantity demanded increases, and vice versa.
• Reason for the Shape:
o Substitution Effect: As the price of a product decreases, it becomes cheaper
relative to other products, encouraging consumers to substitute it for more
expensive alternatives.
o Income Effect: A lower price increases the real income of consumers,
enabling them to buy more of the product.

3. Movements Along the Demand Curve:

• Movement Along the Curve: Changes in the price of the product cause a movement
along the demand curve.
o Price Increase: Results in a movement up the demand curve, reducing
quantity demanded.
o Price Decrease: Results in a movement down the demand curve, increasing
quantity demanded.

4. Shifts in the Demand Curve:

• Shift to the Right: Indicates an increase in demand at every price level (caused by
factors like an increase in consumer income or a rise in the popularity of the product).
• Shift to the Left: Indicates a decrease in demand at every price level (caused by
factors like a decrease in consumer income or a decline in the product's popularity).

Important Terms:

• Demand Curve: A graph showing the relationship between price and quantity
demanded.
• Substitution Effect: Consumers replace more expensive products with cheaper ones
as prices fall.
• Income Effect: A lower price increases consumers' purchasing power, allowing them
to buy more.
• Movement Along the Curve: Changes in quantity demanded due to a change in the
product's price.
• Shift in the Curve: A change in demand due to factors other than the product's price.

Summary:

• A demand curve shows how the quantity demanded of a product changes with its
price.
• It typically slopes downward, meaning as prices drop, demand rises.
• Movements along the curve are caused by changes in price, while shifts in the curve
occur due to changes in factors other than price.
Notes on the Effect of a Change in Price on Demand

1. Impact of Price Changes on Demand:

• A fall in price usually leads to an increase in demand for the product.

• A rise in price typically results in a decrease in demand for the product.

2. Key Terms Explained:

• Extension in Demand: An increase in the quantity demanded due to a decrease in the

product's price.
• Expansion in Demand: Another term for the increase in quantity demanded when the
price decreases.
• Increase in Quantity Demanded: This specifically highlights that the rise in demand
is due to the product's price reduction.
• Contraction in Demand: A decrease in the quantity demanded due to an increase in
the product's price.
• Decrease in Quantity Demanded: This term is used to describe the fall in demand
that occurs when the price of a product rises.

3. Understanding the Terms:

• Extension, Expansion, or Increase in Demand: Indicates that demand is increasing

because the price has dropped.
• Contraction or Decrease in Demand: Indicates that demand is decreasing because
the price has risen.

Important Terms:

• Extension in Demand: Increase in demand due to a price decrease.

• Expansion in Demand: Synonymous with an increase in demand because of a lower
price.
• Increase in Quantity Demanded: Specifies that the cause of increased demand is a
price reduction.
• Contraction in Demand: Decrease in demand due to a price increase.
 • Decrease in Quantity Demanded: Specifies that the cause of decreased demand is a
price increase.

Summary:

• Price decreases lead to higher demand, termed as extension, expansion, or an

increase in quantity demanded.
• Price increases lead to lower demand, termed as contraction or a decrease in
quantity demanded. These changes are directly linked to the changes in the price of
the product itself.

Notes on Conditions of Demand

1. Definition of Conditions of Demand:

• Conditions of demand refer to various factors, other than price, that can cause
demand to increase or decrease. These factors can change how much of a product is
demanded, even if the price stays the same.

2. Examples of Conditions Affecting Demand:

• Weather:
o Hot weather can lead to an increase in demand for products like ice cream.
o Cold weather can cause a decrease in demand for the same product.

3. Effects on Demand:

• Increase in Demand:
o When conditions favor a product (like hot weather for ice cream), demand
increases at every price level.
o This increase is shown by a shift to the right on the demand curve.
• Decrease in Demand:
o When conditions are unfavorable (like cold weather for ice cream), demand
decreases at every price level.
 o This decrease is shown by a shift to the left on the demand curve.

4. Demand Schedule:

• A new demand schedule can be created to reflect the higher or lower demand levels
caused by changes in the conditions of demand.

Important Points:

• Conditions of Demand: Non-price factors that cause demand to change.

• Increase in Demand: Reflected by a rightward shift of the demand curve.
• Decrease in Demand: Reflected by a leftward shift of the demand curve.

Summary:

• Demand for a product can increase or decrease based on various conditions, such as
weather, even if the price remains unchanged. These changes are shown by shifts in
the demand curve to the right (increase) or left (decrease).

Notes on Causes of Changes in Demand

1. Introduction:

• Demand for a product can change even if its price remains the same. Several factors
influence these changes.

2. Key Factors Influencing Demand:

A. Changes in Income:

• Normal Goods:
o When income increases, demand for normal goods increases. These are
products people buy more of as they become wealthier.
• Inferior Goods:
 o When income increases, demand for inferior goods decreases. These are
products people buy less of as they can afford better alternatives.

B. Changes in the Price of Related Products:

• Substitutes:
o If the price of a substitute (a product that can replace another) goes up,
demand for the original product increases.
• Complements:
o If the price of a complement (a product used together with another) rises,
demand for the original product decreases.

C. Advertising Campaigns:

• Successful advertising can increase demand by attracting new customers and

encouraging existing customers to buy more.

D. Changes in Population:

• Population Size:
o An increase in population usually leads to higher demand for most products.
• Age Composition:
o An ageing population may increase demand for products like healthcare and
wheelchairs, while decreasing demand for items like toys.

E. Changes in Taste and Fashion:

• Trends and cultural shifts can significantly affect demand. For example, a rise in
vegetarianism can decrease meat demand, while fashion trends can boost sales of
specific clothing items.

F. Other Factors:

• Weather:
o Changes in weather can impact demand for seasonal items like ice cream or
umbrellas.
• Expectations:
o If people expect prices to rise in the future, they may buy more now,
increasing current demand.
• Special Events:
o Events like the Olympics can temporarily increase demand for certain
products, such as travel to the host country.

Important Terms:

• Normal Goods: Products for which demand increases as income increases.

• Inferior Goods: Products for which demand decreases as income increases.
• Substitutes: Products that can replace each other.
• Complements: Products used together with other products.
Summary:

• Demand for a product is influenced by multiple factors, including income levels,

prices of related goods, advertising, population changes, taste and fashion trends, and
external events like weather changes and special occurrences. Understanding these
factors helps predict and analyze demand shifts in the market.