Formula for Revenue
Price * Quantity
Factors which cause a shift in demand
Population
Advertising
City Speculators
Income (disposable)
Fashion/trends/tastes
Interest rates
Complementary goods (price of)
Substitute goods (price of)
Relation between population and demand
The larger the population, the more demand there is for most goods
Relation between advertising and demand
Advertising is designed to change our preferences
Effective advertising and marketing will make products more attractive and increase demand
Relation between city speculators and demand
If speculators feel a commodity will increase in value, they will buy more of it which increases demand. However, this is only relevant to asset markets e.g. Bitcoin, property, stocks
Relation between change in real disposable income and demand
Effective demand is affected by our willingness and ability to purchase a good or service. There are always some things that we can’t afford; the economic problem demands that we make choices
Real Disposable Income
The amount of money an individual or household has available to spend or save after accounting for taxes and adjusting for inflation
Normal goods
A good where demand increases when income increases e.g. luxury goods
Inferior goods
A good where demand decreases when income increases e.g. canned goods, Tesco value sausages
Relation between change in taste and preferences and demand
Over time, consumer tastes and preferences change according to fashions. Fashion makes products more desirable, which means more people will start buying and demand for the product will increase
Relation between interest rates and demand
A fall in interest rates will make it cheaper to borrow, so demand for loans and thus consumption of a good may increase. An increase in credit lent out by banks will cause an increase in purchasing power for consumers. This is usually applicable for ‘big ticket’ items e.g. home, car, sofa
Relation between change in price and availability of other products and demand
The demand for one product, at each and every price, will be affected by the price of a different but related product, complements or substitutes.
Complementary goods
Two goods that are consumed together e.g. toothbrush and toothpaste
Substitute goods
Two goods that are used instead of one another
Demand
The quantity of goods that consumers are willing and able to each price
Law of Demand
Assuming ceteris paribus, if the price of the good rises, the quantity demanded of that good decreases.
If the price of the good falls, the quantity demanded of that good increases.
Effective Demand
When demand is backed up by an ability to pay e.g. sports top
Latent Demand
When a consumer want is not backed up by an ability to pay e.g. Ferarri
Derived Demand
When the demand is not for the product itself but for what it provides e.g. Uber, Demand for Labour
Complementary Demand
When the demand for one product increases the demand for another that is used in conjunction (e.g. lamb & mint sauce)
Utility
The satisfaction derived from consuming a good
Marginal Utility
Extra satisfaction from consuming a good
Diminishing marginal utility
When a consumer consumes additional units of a good, the extra utility they derive will decrease
The Law of Diminishing Marginal Utility
For every additional unit of a good consumed, consumers are likely to pay less as the utility gained from its consumption falls
Substitution effect
When the price falls, the good becomes cheaper relative to its substitutes. Some consumers will switch their purchases from the more expensive substitutes
Income effect
When the price of a good falls, a consumer’s real income may increase. The purchasing power of a consumer’s nominal income has increased, so more can be bought
Supply
The quantity that producers are willing and able to supply at each price
Law of Supply
Assuming ceteris paribus, if the price of a good rises, the quantity supplied of that good increases. If the price of a good falls, the quantity supplied of that good decreases.
Reasons why the supply curve is upward sloping
Profit incentive
Firms incentive to increase profit. As price increases, firms are encouraged to increase the quantity supplied
Production costs
As firms’ output increases in the short run, production costs increase. In order to cover costs, firms need to charge higher prices
New entrants
Higher prices create incentive for new firms to enter the market, increasing quantity supplied
Factors which cause a shift in supply (PINTS WC)
Productivity
Indirect tax
New entrants
Technology
Subsidies
Weather/War
Costs of production