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"If I asked 100 people if they wanted the latest iPhone 17, I'm pretty sure the response would be 100% yes!"
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"...so should Apple order more raw materials, hire more staff, etc in order to satisfy these extra customers?"
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"Nah!!! Willingness to have the latest phone is not enough. Unless the customers can back that willingness with purchasing power, then the phone companies has no reason to order more raw materials, hire more staff, etc. Willingness backed by the ability to pay is called EFFECTIVE DEMAND in that it directly affects the allocation of scarce productive resources."
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"So what exactly is 'demand'?
"Assuming only effective demand is considered, then we can define DEMAND as 'the amount of a good or service that is demanded at each price level'."
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--THE LAW OF DEMAND--
--THE LAW OF DEMAND--
"So how does Apple price its iPhone 17?"
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"If they set the price too high, what will happen to the quantity of phones demanded?
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"That's right, higher price => lower Qd ...and what about if they set it too low?"
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That's right, lower price => higher Qd"
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This inverse relationship is called 'THE LAW OF DEMAND', which states that there is a NEGATIVE RELATIONSHIP between price (P) and quantity (Q) of a good demanded: "THE HIGHER (LOWER) THE PRICE, THE LOWER (HIGHER) THE QUANTITY DEMANDED, CETERIS PARIBUS*..."
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↓ *We will revisit this later.
--THE DEMAND CURVE--
--THE DEMAND CURVE--
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"When we plot this inverse relationship with the price of the good on the Y-axis and quantity on the X-axis, we 'derive' the DEMAND CURVE.
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"A CONTRACTION IN DEMAND is a DECREASE IN THE QUANTITY of a good or service that consumers are willing to DEMAND due to a RISE IN THE PRICE."
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"An EXTENSION IN SUPPLY is an INCREASE IN THE QUANTITY of a good or service that consumers are willing to DEMAND due to a FALL IN THE PRICE."
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--TASK--
"Sketch a demand curve illustrating a price change, and explain what happens in terms of the 'price', 'law of demand', 'contraction' or 'extension', etc." (4 marks)
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"You can use this diagram to help you."
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--INDIVIDUAL & MARKET DEMAND--
--INDIVIDUAL & MARKET DEMAND--
"Obviously Apple is not interested in the quantity of phones that a single individual consumer is willing and able to buy at each price level (called 'INDIVIDUAL DEMAND'); it wants to know the quantity that the summation of all individuals in the entire market are demanding at each price level (called 'MARKET DEMAND'), so it can start organising its factors of production to deliver them right!"
"Diagramatically, this is the 'horizontal summation' of all individual demand curves. Let's see how a market demand curve is derived from individual demand curves below."
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"Diagramatically, this is the 'horizontal summation' of all individual demand curves. Let's see how a market demand curve is derived from individual demand curves below."
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"Further practice on how to construct a demand curve from a demand schedule."
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--THINK ALOUD--
So we have this downward trend that occurs DUE TO CHANGES IN PRICE, as when price falls the quantity demanded rises (and vice versa), but why? What impacted your willingness and ability to pay for pizza when the price changed?
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Q. Is it related to how much money you 'currently' have?
Q. Is it related to the 'current' price of substitutes?
Q. Is it about the amount of satisfaction you receive per slice?
--ASSUMPTION OF LAW (HL)--
"Why does the demand curve slope downwards?"
--THE INCOME EFFECT--
"As the price of coke falls, I can afford more...!"
"If we assume INCOMES ARE FIXED, a DECREASE IN PRICE will INCREASE the 'PURCHASING POWER' of the income (and vice versa), allowing EXISTING CONSUMERS TO BUY MORE, as well as enticing NEW CUSTOMERS to purchase the more affordable product."
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"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."
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--TASK--
"Explain how this image illustrates the 'income effect'."
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--THE SUBSTITUTION EFFECT--"As the price of Coke falls, relative to Pepsi, I will now try it.!"
"If we assume THE PRICE OF ALL SUBSTITUTES STAYS FIXED, then a fall in the price of a good with a very close substitute will not only benefit from the 'income effect', but also, they will be ABLE TO ATTRACT CUSTOMERS AWAY FROM THEIR RIVAL, who is now comparatively more expensive."
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"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."
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--TASK--
"Explain how this image illustrates the 'substitution effect'."
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--LAW OF DIMINISHING MARGINAL UTILITY--"The first sip of Coke is amazing, I'd pay up to £10, but only £5 for the second, and £2 for the 3rd.!"
"According to the LAW OF DIMINISHING MARGINAL UTILITY, the MARGINAL BENEFIT (UTILITY) that a consumer derives from consuming each additional unit of a good GETS PROGRESSIVELY LOWER for EACH ADDITIONAL UNIT CONSUMED. Now if marginal utility is expressed in a monetary form, we can say that the greater the quantity consumed, the lower the marginal utility and the less the rational consumer would be prepared to pay, in other words, THE PRICE A CONSUMER IS WILLING TO PAY GETS PROGRESSIVELY LOWER for EACH ADDITIONAL UNIT."
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"Therefore, we can say that there is an INVERSE RELATIONSHIP between the quantity consumed and the willingness to pay (marginal benefit). In other words, as MORE IS CONSUMED, THE WILLINGNESS TO PAY FALLS..."
"This follows the law of demand, which states that 'MORE IS DEMANDED WHEN PRICE FALLS."
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--TASK--
"Sketch...., yes I said sketch the sequence of images below and use them to explain how the 'law of diminishing marginal benefits' contributes to the downward slope of the demand curve."
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--THINK ALOUD--
"Are we agreed that the law of demand states that a higher price will always lead to a fall in quantity demanded? "So what's going on here? Has the law been violated?"
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"Nope, we just forgot to add the 'ceteris paribus' part at the end of the law, which translates as 'all other non-price factors are constant', meaning in this case, if the weather is assumed fixed (either always raining or always not raining), a higher price of umbrellas should still reduce the quantity demanded."
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"Look at the two images below to help you consolidate your understanding. The image on the left shows how the change in the non-price determinant of demand (the unexpected rainy day) resulted in a greater level of demand at each price level (represented by a rightward SHIFT in the demand curve), allowing him to raise his prices, but as soon as the weather is considered fixed (raining all the time) when the seller puts up his prices, the quantity demanded falls (represented by a CONTRACTION or MOVEMENT UP the demand curve) in accordance with the law of demand."
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"Other than change in the weather, what are examples of other non-price determinants of demand?"
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--𐤃 NON-PRICE DETERMINANTS--
--𐤃 NON-PRICE DETERMINANTS--
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--𐤃INCOME--"Great!!! I now have more money in my pocket, and prices have stayed the same, so I'm buying more!"
"When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER INCREASES (in other words, their REAL INCOME RISES), which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded more are called 'NORMAL GOODS'."
--INCOME RISES => INCREASE IN DEMAND => 'NORMAL GOOD'--
--INCOME FALLS => DECREASE IN DEMAND => 'NORMAL GOOD'--
E.G. LUXURY GOODS, TECHNOLOGY, TRAVEL, PRIVATE EDUCATION...
"When households have HIGHER INCOMES, assuming stable prices, their PURCHASING POWER increases, which means they are more likely to DEMAND MORE and vice versa. Those goods which are demanded LESS of are called 'INFERIOR GOODS'."
INCOME RISES => DECREASE IN DEMAND => 'INFERIOR GOOD'
INCOME FALLS => INCREASE IN DEMAND => 'INFERIOR GOOD'
E.G NECESSITY GOODS, RICE, DOMESTIC FLIGHTS...
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--𐤃PRICE OF SUBSTITUTES--"The price of a Coke has risen, so I'm buying more Pepsi!"
"SUBSTITUTES are goods or services that are often bought as alternatives to other goods, therefore any CHANGE IN THE PRICE of one will have a direct impact on the DEMAND for the other."
For SUBSTITUTE Good X and Good Y:
If the PRICE of Good X RISES => The DEMAND for Good Y RISES.
If the PRICE of Good X FALLS => The DEMAND for Good Y FALLS.
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--𐤃PRICE OF COMPLEMENTS--"The price of fries has fallen, so I'm off to buy more ketchup!"
COMPLEMENTS are goods and services that are usually bought in conjunction with the purchase of another good, therefore any CHANGE IN THE PRICE of one will have a direct impact on the DEMAND for the other.
For COMPLEMENTARY Good X and Good Y:
If the PRICE of Good X RISES => The DEMAND for Good Y FALLS.
If the PRICE of Good X FALLS => The DEMAND for Good Y RISES.
--EXPECTATIONS--
"I think Bitcoin will rise in price, so I better buy now!"
If the PRICE of Good X IS EXPECTED TO RISE => The DEMAND RISES.
If the PRICE of Good X IS EXPECTED TO FALL => The DEMAND FALLS.
--MOVEMENTS vs SHIFTS--
--MOVEMENTS vs SHIFTS--
--TASK--
"Explain, with the help of a diagram, how the following situation occurs without violating the law of demand."
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"The price of real estate is rising, yet so is the demand."
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"The law of demand states (...) the fact that the price of real estate is rising, yet so is the demand, does NOT violate this law because... we can illustrate this using a demand and supply diagram....we can see that"
--TASK--
"Go to the IBDP econ QB, and find a 'demand-related' 10-marker, and use the MS to build a model answer to put in your 'not-official answer booklets'."
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