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BUS 207 Study Guide - Demand Curve, Economic Surplus, Inferior Good


Department
Business Administration
Course Code
BUS 207
Professor
Allan Matadeen

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Chapter 2 Market forces: Demand and Supply
Demand
Market demand curve
A curve indicating the total quantity of a good all consumers are willing
and able to purchase at each possible price, holding the prices of related
goods, income, advertising, and other variables constant.
Demand shifters
Variables other than the price of a good that influence demand are known
as demand shifters.
For a demand curve, the movement along the demand curve is called
change in quantity demanded.
Whenever advertising, income, or the price of related goods changes, it
leads to a change in demand; the position of the entire demand curve
shifts. A rightward shift in demand curve is called an increase in demand,
since more of the good is demanded at each price. A leftward shift in the
demand curve is called a decrease in demand.
Income
Whether an increase in income shifts the demand curve to the right or to
the left depends on the nature of consumer consumption patterns.
Accordingly, economists distinguish between two types of good: normal and
inferior goods.
A good whose demand increases when consumer incomes rise is called a
normal good.
Changes in income tend to have profound effects on the demand for
durable goods, and these effects are typically amplified in developing
countries and rural areas.
Inferior good is a case of a increase in income reduces the demand for a
good. Example like Bologna, bus travel, and generic jeans are inferior
goods.
Price of related goods
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Substitutes: Goods for which an increase (decrease) in the price of one
good leads to an increase (decrease) in the demand for the other good. Like
Coke and Pepsi. Substitutes need not serve the same function; for
example, automobiles and housing could be substitutes.
Complements: Goods for which an increase (decrease) in the price of one
good leads to decrease (increase) in the demand of the other good.
Advertising and consumer tastes
Advertising often provides consumers with information about the
existence or quality of a product, which in turn induces more
consumers to buy the product. These types of advertising message are
known as informative advertising.
Advertising can also influence demand by altering the underlying
tastes of consumers. For example, advertising that promotes the latest
fad in clothing may increase the demand for a specific fashion item by
making consumers perceive it as the thing to buy. These types of
advertising message are known as persuasive advertising.
Population
The demand for a product is also influenced by changes in the size and
composition of the population. Generally, as the population rises, more
and more individuals wish to buy a given product.
Consumer Expectations
If consumers expect future prices to be higher, they will substitute
current purchase for future purchases. This behavior is called
stockpiling and generally occurs when products are durable in nature.
The current demand for a perishable product such as bananas
generally is not affected by expectations of higher future prices.
Other Factors
Health scare-cigarette; baby birth-diapers
The demand function
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