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Micro-economics: The Theory of…
Micro-economics: The Theory of Demand
Demand:
The quantity consumers are willing and able to buy at any given price.
The Demand Curve:
A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. There are two reasons why more is demanded as the price falls.
The Income Effect:
there is an income effect when the price of a good falls because the consumer can maintain the same consumption for less expenditure. provided that the good is normal, some of the resulting increase in real income is used to buy more of this product.
The Substitution Effect:
There is a substitution effect when the price of a good falls because the product is now relatively cheaper than an alternative item and some consumers switch their spending from the alternative good or service.
Factors That Could Affect Demand Are:
Trends:
the fashionable trends can alter people's decisions on goods and services and can lead to an increase in demand for certain goods and services.
Technology Advances:
The advances of technology can create demand and cause a decrease in demand for older products such as video tape players.
Interest Rates:
Depending on if they are high or low people would have more or less disposable income to spend on goods and services.
Time of Year:
Seasons can cause demands for different food items and the availability of different items.
The Law of Demand:
There is an inverse relationship between the price of a good and demand.
As prices fall, we see an expansion of demand
If prices rise, there will be a contraction of demand.
Utility:
A measure of the satisfaction that we get from purchasing and consuming a good or service.
Total Utility:
the total satisfaction from a given level of consumption.
Marginal Utility:
The change in satisfaction from consuming and extra unit.
Beyond a certain point, marginal utility may start to diminish.
If marginal utility is falling, then consumers will only be prepared to pay a lower price.This helps to explain the downward sloping demand curve.
Derived Demand:
The demand for a factor of production used to produce another good or service
Composite Demand:
Where goods have more than one use - an increase in the demand for one product leads to a fall in supply of the other.
Complementary Demand:
Complements are said to be in joint demand. A rise in the price of a complement to good X should cause a fall in the demand for good Y