When price changes, there is a movement along the demand curve. As an increase in price
almost always leads to a decrease in demand, the demand curve is always downwards sloping.
Mathematically, it means there is an inverse relationship between quantity demanded and
price.
The conditions of demand all cause demand for a certain product to change. Changes in the
conditions of demand cause a shift in the demand curve.
Some conditions of demand include:
- Income levels
- Weather conditions
- Changes in legislation
- Time of the year (e.g. Christmas might cause more Santa hats to be sold, and more sun
cream may be sold in the summer than in the winter)
- Advertising
- Prices of other alternative goods
- Change in population
Demand and income are connected in that as income rises, demand for a normal good also
rises. The demand for inferior goods, however, fall when income rises.
The law of diminishing marginal utility is the decrease in satisfaction a consumer has from the
consumption of each extra unit of a good or service. Simply put, satisfaction decreases as
consumption increases.
The consumer surplus is the difference between a buyer’s value of a product and what they
actually pay. If a buyer is willing to pay £1m for a diamond, but they only have to pay
£800,000, there would be a consumer surplus of £200,000. £200,000 that the consumer would
have been happy to pay, but never had to. The consumer surplus is the area below the demand
curve but above the observed price (P1).
ELASTICITIES OF DEMAND
Elasticity is a measure of how much the quantity demanded or supplied will be affected by a
change in price, income or other factor.
PRICE ELASTICITY OF DEMAND
Price Elasticity of Demand can be calculated using the equation…
Demand is price elastic if the value of the elasticity is greater than one. Demand is price inelastic
if the value of the elasticity is less than one. Demand is of unitary elasticity if the value of the
elasticity is exactly one.
Perfectly elastic demand can be shown as a horizontal graph.
Perfectly inelastic demand can be shown as a vertical graph.
Unitary elasticity can be shown as a downwards sloping inverse curve.
Description of Numerical measure Change in revenue
response to a change of elasticity as price increases
in price
Perfectly Inelastic Quantity demanded 0 Increases
does not change at all
as price changes
Inelastic Quantity demanded 0 to -1 Increases
changes by a smaller
percentage than
price does
Unitary Elasticity Quantity demanded -1 Constant
changes by exactly
the amount price
does
Elastic Quantity demanded -1 to ¥ Decreases
changes by a large
percentage than
price does
Perfectly Elastic Quantity demanded ¥ Decreases to 0
will increase
infinitely when the
price decreases
There are two determinants of price elasticity of demand
- The availability of substitute goods (The better the substitutes for a product, the
higher the price elasticity of demand will tend to be. If there are more better alternatives
to a product, a change in price will rapidly decrease demand for a product, as people
will switch to the alternative product. If there are less good alternatives, people may,
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