How Markets Work - Introductory Demand Concepts

Here are some core revision notes covering an introduction to the operation of markets and the working of the price mechanism.

What is meant by?

COMPLEMENT

Goods and services that are used and bought together e.g. milk and sugar, pancakes and lemon, printers and paper

CONDITIONS OF DEMAND

Any factor other than price which might lead to an outward / inward shift of demand for a product e.g. interest rates, income

DEMAND

The amount that consumers are willing and able to purchase of a good/service at a given price in a given time period

MARGINAL UTILITY

The change in total satisfaction from consuming one extra unit of a product

PROFIT

The difference between total revenue and total cost, profit is a reward to risk-taking by an entrepreneur

RATIONAL BEHAVIOUR

Rationality means using all the available information to make optimal choices and also learning and responding to mistakes.

REAL INCOME

Money income adjusted for price changes – measures the quantity of goods and services that a given budget can buy

SUBSTITUTE GOOD

A good in competitive demand with another product e.g. two brands of beer, Netflix versus Amazon Prime

UNRELATED GOODS

Where a change in the price of one product (e.g. cheese) has not impact whatsoever on the demand for another product (e.g. foreign holidays)

WILLINGNESS TO PAY

Otherwise known as effective demand, i.e. when demand from a consumer is backed by an ability to pay

Give me 5 reasons why demand may increase (i.e. the demand curve shifts to the right)

• 1. Increasing income (for normal goods)
• 2. Decreasing income (for inferior goods)
• 3. Rising price of substitutes
• 4. Falling price of complements
• 5. Effective advertising

Give me 5 reasons why demand may decrease (i.e. the demand curve shifts to the left)

• 1. Change in consumer tastes and preferences away from the product
• 2. Rise in interest rates leading to a fall in demand for products bought on credit
• 3. Expected fall in prices leading consumers to delay their purchases
• 4. A rise in unemployment during a recession
• 5. A rise (appreciation) in the exchange rate which makes import (substitutes) cheaper

Identify 3 factors behind the growth of market demand for low-emission cars in the UK:

1. Government grants for plug-in hybrid cars (now ended)
2. Expansion of network of charging stations and falling prices for recharging
3. Higher fuel taxes on petrol and diesel vehicles

Identify 2 other (related) products whose demand will be impacted by the data in the chart:

1. Demand for electric vehicle charging stations
2. Demand for solar panels for households to charge their cars at home

Identify 1 policy a government could use to stimulate demand for ultra-low emission cars:

1. Increasing the fuel duty on all petrol/diesel vehicles