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Unit 1

Unit 1. 1.6 Kno-how! on Demand. 1.6 Demand. Students should be able: Understand how a change in price causes a movement along a demand curve.

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Unit 1

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  1. Unit 1 1.6 Kno-how! on Demand

  2. 1.6 Demand • Students should be able: • Understand how a change in price causes a movement along a demand curve. • Understand factors which may cause a shift in the demand curve, for example, changes in the price of substitutes or complementary goods; changes in real income and tastes.

  3. Individual and market demand • Market demand – consists all individual demands added together. • Represented by a demand curve drawn as a line • Consumers generally willing to purchase less than at higher prices • Therefore demand curves have a negative slope, downward sloping from left to right

  4. The demand curve Price (£) £10 £5 Demand 100 190 Quantity Demanded (000s)

  5. The demand curve • The level of demand – • determines where on the graph it sits • Low demand • is nearer the origin • High demand • is further from the origin (assuming same scale) • Dependent on a variety of factors • Demand curve moves in response to changing factors

  6. The demand curve Changes in any of the factors other than price causes the demand curve to shift either: • Left (decrease in demand at each price) or • Right (increase in demand at each price)

  7. The demand curve Price (£) £10 D1 Demand D2 10 100 200 Quantity Demanded (000s)

  8. Factors which move demand curves • Income • Advertising • Tastes and Fashion • Availability of Credit • Meteorological Factors • Other goods – complements / substitutes • Population (size / structure)

  9. Derived demand • Where the demand for one good is dependent on the demand for another related good • eg the demand for new office construction is derived from the demand for office space • eg the demand for construction workers is derived from the demand for construction work

  10. Derived demand Wage Rate (£ per hour) S Plasterers Price (000s) S Houses 20 200 Shortage 12 180 D1 D1 D D 100 130 80 90 120 Quantity hired Quantity bought and sold

  11. Price D P P1 D Qd Qd1 Quantity An EXPANSION in quantity demanded Qd > Qd1 = EXPANSION in Quantity Demand

  12. A CONTRACTION in Quantity Demanded Price Qd > Qd1 = CONTRACTION in Quantity Demand P1 P D Qd1 Qd Quantity

  13. A decrease in demand Price D Qd > Qd1 = decrease in demand D1 P D D1 Qd1 Qd Quantity

  14. A increase in demand Price D1 Qd > Qd1 = increase in demand D P D1 D Qd Qd1 Quantity

  15. Key terms: • Normal good — one for which demand increases as income rises • Inferior good — one for which demand falls as income rises, eg bus travel, own-brand supermarket spaghetti sauce • Giffen Goods – an inferior good accounting for such a proportion of income that its consumption rises when it price rises. • Complementary good — a good that is bought with another good, eg cinema tickets and popcorn • Substitute good — a good that is bought instead of another good ie consumers choose between one or the other, eg gold engagement rings or platinum engagement rings.

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