• Market is a place where buyers and sellers meet, to trade goods and services in exchange for money.
• Demand is the amount of goods or services desired by consumers, that are both willing & able to buy the good at a certain price, at a certain time.
• Change in quantity demanded : movement along a demand curve.
• Change in demand: Shift of demand curve to the left or right.
• Ceteris Paribus, the law of demand states that quantity demanded is inverse to the price, if price increases demand contracts and price decreases demand extends.
• Factors affecting Demand:
  • Price of related goods: Substitutes: fall in price of a product will cause an increase in quantity demanded for it and a fall in demand for its substitute vice versa. Complements : Products purchased together. Fall in price of a product will cause an increase in quantity demanded of it and an increase in demand for its complement.
  • Income ⇒ Normal: Income increases, able to afford more, demand shifts to the right and vice versa. Inferior Goods: Demand falls as income increase as consumer switch to more expensive substitutes.
  • Taste and Preference
  • Global Factors
  • Price speculation : If consumers think prices will increase in the future they will demand more of the product normally if there is inflation or an announcement by government implementing expansionary policies, or taxes. Real world example: "Black Friday": demand curve shifts to the left in the present period.

Increase and Decrease in demands takes place when a factor other than price changes.

Reasons behind the law of demand

• Income effect: Price falls; real income increases; allows to buy more of the good.
• Law of diminishing marginal utility, value of the first burger isn't as valuable as the second, with more consumption marginal utility decreases. So they will be willing to pay less for each extra unit of good consumed.
• Veblen Effect is the effect where demand increases even when price is increasing, this is due to the fact that YED>1 and people feel luxurious by consuming Veblen Goods at a higher price
• Example of demand falling due to price speculation: weeks before Black Friday

Exception to the Law of Demand

Veblen Goods : quantity demanded rises as price increases. Goods become more popular when price increases due to conspicuous consumption(satisfaction gained from being seen to consume expensive products. Initially as price increases, quantity demanded falls but after a certain level of price, it reaches snob value status and quantity demanded starts to increase again.

HL portion

Behavioural Economics and demand

Key assumptions of the neoclassical theory