competitive markets -demand€¦ · causes of shifts in the demand curve 1. changing prices of...
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CompetitiveMarkets- Demand
IBSection1:Microeconomics
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DemandforGoodsandServices
• Basicdefinitionofdemand:• Demandforagoodorserviceisthe
quantitythatpurchasersarewillingandabletobuy atagivenpriceinagivenperiodoftime.
• Effectivedemand:• Onlyifdemandforaproductisbacked
upbyawillingnessandabilitytopaythemarketpricedoesdemandbecomeseffectiveorrealizedoractual.
• Thebasiclawofdemandisthatdemandvariesinverselywithprice–lowerpricesmakeproductsmoreaffordableforconsumers.
Effectivedemand isbackedupwithan
abilitytopay
Potential(latent)demandisnotyetexpressedinthe
market
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TheDemandCurve:Price&QuantityDemanded
PriceofCoffee
Quantitydemandedofcoffee
DemandforCoffee
P1
Q1
P2
Q2
P3
Q3
Ahigherpriceleadstoacontraction ofquantitydemanded
Alowerpriceleadstoanexpansionofquantitydemanded
Onlychangesinmarketpricecauseamovementalongthedemandcurve
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IncomeandSubstitutionEffectsofaPriceChange
Incomeeffect
• Afallinpriceincreasestherealpurchasingpowerofconsumers
• Thisallowspeopletobuymorewithagivenbudget
• Fornormalgoods,demandriseswithanincreaseinrealincome
Substitutioneffect
• AfallinthepriceofgoodXmakesitrelativelycheapercomparedtosubstitutes
• SomeconsumerswillswitchtogoodXleadingtohigherdemand
•Muchdependsonwhetherproductsareclosesubstitutes
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CausesofShiftsintheDemandCurve
1. Changingpricesofsubstitutes incompetitivedemand2. Changingpriceofacomplements– i.e.productsinjointdemand3. Changesintherealincomeofconsumers
– Whenrealincomegoesup,ourabilitytopurchaseincreases,andthiscausesanoutwardshiftinthedemandcurve.
– Butwhenincomesfalltherewillbeadecreaseindemand,exceptforinferiorgoods
4. Changesinthedistributionofincome- amoreequaldistributionofincomecanincreasetotaldemandbecauserelativelypoorerconsumersspendahigherproportionoftheirincome
5. Theeffectsofadvertisingandmarketing6. Interestratesanddemand(e.g.affectingthecostofcredit)7. Changesinthesizeandagestructureofapopulation8. Seasonalfactorsforsomegoodsandservices9. Socialandemotionalfactors influencingpreferencesandchoices
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IllustratingShiftsintheDemandCurve
PriceofCoffee
Quantitydemandedofcoffee
D1
P1
Q1 Q2
D2D3
Q3
D1toD3isaninwardshiftofdemand– lessisdemandedateachmarketprice
D1toD2isanoutwardshiftofdemand– moreisdemandedateachmarketprice
Changesinpricedonotcauseshiftsinthedemandcurveforaproduct
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MarketDemand:GlobalSalesofWearableDevices
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20
40
60
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100
120
140
160
2013 2014 2015
Shipmentsinmillion
s
Wearable cameras Smartglasses Smartwatches
Healthcare Sports/activitytrackers Wearable 3Dmotiontrackers
Smartclothing
Globalmarketdemandforwearabledevicesissoaring– towhatextentaresocialfactorsmoreimportantthanfactorssuchasincome?
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FallingDemand:GlobalSalesofAppleiPods
RisingdemandforsuperiortechnologyproductshascausedApple’sglobalsalesoftheiPodtocollapseinrecentyears
39.41
51.6354.83 54.13
50.31
42.62
35.17
26.38
14.38
0
10
20
30
40
50
60
2006 2007 2008 2009 2010 2011 2012 2013 2014
Salesinmillionunits
fiscalyears
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ChangingPreferences– MovieConsumptionintheUK
0.0%5.0%10.0%15.0%20.0%25.0%30.0%35.0%40.0%45.0%
Q32010 Q12011 Q32011 Q12012 Q32012 Q12013 Q32013 Q12014 Q32014 Q12015
Shareofre
spondents
BoughtDVD/Blu-ray Anydigital
Paidofficialdigital(DTO/VOD) Unofficialdigital(pirate)
Thepatternofdemandformoviesischanging!Digitalsalesnowaccountfor20%ofsalesandthesharefromphysicalsalesisfalling.
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TheConceptofUtility
• Utilityisameasureofthesatisfaction thatwegetfrompurchasingandconsumingagoodorservice
• Totalutility:– Thetotalsatisfactionfromagiven
levelofconsumption• Marginalutility
– Thechangeinsatisfactionfromconsuminganextraunit
• Standardeconomictheorybelievesintheideaofdiminishingreturnsi.e.themarginalutilityofextraunitsdeclinesasmoreisconsumed
Utilityisameasureofsatisfactionfrom
consumption
Doestheutilitywegetaffectour
willingnesstopay?
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DiminishingMarginalUtilityandDemandCurve
• Marginalutilityisthechangeinsatisfactionfromconsuminganextraunitofagoodorservice
• Beyondacertainpoint,marginalutilitymaystarttofall(diminish)
• Thishappenswiththe4th unitwhereMUfallsto12
• The8th unitcarrieszeromarginalutilityi.e.totalutilityisconstant
• Ifmarginalutilityisfalling,thenconsumerswillonlybepreparedtopayalowerprice
• Thishelpstoexplainthedownwardslopingdemandcurveforagoodorservice
QuantityConsumed
TotalUtility(TU)
MarginalUtility(MU)
1 10 10
2 24 14
3 40 16
4 52 12
5 61 9
6 68 7
7 72 4
8 72 0
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TheParadoxofValue
• TheParadoxofValueisalsoknownasthediamond-waterparadox• Weunderstandthatwaterisnecessarytosustainlifeandthatornaments
suchasdiamondsarejustthat– certainlylifesustaining.• Butwatertypicallyhasalowprice,whileapieceofdiamondjewelryhasa
ahighmarketprice.• Onereasonisthatwaterisabundantrelativetodemandwhereas
diamondsarescarcerelativetodemand• Valueinusei.e.drinkingwatertosatisfyyourthirst• Valueinexchange– whataresourcecanbesoldforinexchangeforother
products.Nothingismoreusefulthanwater:butitwillpurchasescarceanything.Thereverse isusuallytrueforexpensivejewelry
Cheapwater Expensivejewelry
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SeasonalDemandforGoodsandServices
• Seasonalityreferstofluctuationsinoutputandsalesrelatedtotheseasonaloftheyear.
• Formostproductstherewillbeseasonalpeaksandtroughsinproductionand/orsales
• DemandforslipperspeaksintherunuptoChristmas
• Demandforplantsatgardencentresislinkedtotheplantingseason
• ThereishighdemandfordecoratingmaterialsbeforetheEasterweekend
• Highstreetretailerssuchasjewelrycompaniesmaysellasmuchas80-90%oftheirproductsoverXmas
• Theatrestakeahigh%oftheirincomeduringpantomimeseason
Easterchocolate
Summerfruits
Winterclothing Skiseasonproducts
Someexamplesofseasonaldemand
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Social&EmotionalFactorsInfluencingDemand
Socialfactors:• Socialawarenesse.g.awarenessofhealthrisksfromsmoking,gambling
• Socialnorms - changingnormsofbehavioure.g.demandforrecycledbags
• Socialpressurese.g.peerpressuresaffectingdemandforlegalhighs&otherdrugs
Emotionalfactors:• Emotionalarousalcanaffectthedemandforhealthinsuranceaftermajorincidents
• Bingedrinkingandeatingattimesofpersonalinsecurity
• Demandforproductssuchasfootballseasonticketsandantiquesalsohasastrongemotionalattachment
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NetworksandDemandChoices
Increasinglyinthedigitaleconomy,thechoicesmadebyconsumersareinfluencedbythedecisionsofothers.Agoodexampleisthedecisionaboutwhichmessengerapptouse.
800
700
549
300
249
211
200
91
48
0 100 200 300 400 500 600 700 800 900
FacebookMessenger
Skype*
Viber*
LINE
Kik*
BlackBerryMessenger
KakaoTalk
Monthlyactiveusersinmillions
*July2015data
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MarketDemand– theRiseoftheiPhone!
TheAppleiPhonewaslaunchedin2007andin2015annualsalesareexpectedtoclimbabove230millionunits.(Source:Apple).Inthefirstthreequartersof2015,Appleclaimed92percentofthesmartphoneindustry’saggregateprofits
1.3911.63
20.7339.99
72.29
125.05
150.26169.22
231.22
0
50
100
150
200
250
2007 2008 2009 2010 2011 2012 2013 2014 2015
Unitsalesinmillions
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DerivedDemand
• Deriveddemandisthedemandforafactorofproductionusedtoproduceanothergoodorservice
• Steel:Thedemandforsteelisstronglylinkedtothemarketdemandforcarsandtheconstructionofnewbuildings.
• Wood:Woodisaproductwheremuchofthedemandcomesfromtheusestowhichitcanbeput.– TheenduseofwoodintheUKis:Construction:60%,Furniture:15%,Packaging:15%,Fencing:7%,Other:3%
• Labour:Infactormarkets,thedemandforlabourisderived• Transport:Anincreaseinthedemandforairtravelwillleadtoa
riseinthedemandforairplanepilots.
Theideaofderiveddemand isimportant tousewhendiscussing inter-relationshipsbetweenmarkets.Manyquestionsconsider twoormoremarkets.
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CompositeDemand
• Compositedemandexistswheregoodshavemorethanoneuse - anincreaseinthedemandforoneproductleadstoafallinsupplyoftheother
• Anexampleismilkwhichcanbeusedforcheese,yoghurts,cream,butterandotherproductsincludingfertilizer!
• Anotherexampleis land – e.g.farmlandcanbedevelopedinmanydifferentways,urbanlandhasdifferentusesetc.
• Oilisusedinmanydifferentindustriessuchasplastics.
Butter Yoghurt
MilkChocolate Cheese
Unprocessedmilkhasmanyfinaluses
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TheFallandRiseofVinylAlbumSalesintheUK
In2014,over1.2millionvinylLPsweresoldintheUK,upfromjust205,000soldin2007.Whatmightexplainthisrebound?
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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
LPssold
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LinearDemandFunctions
• Thedemandfunctioncanbewrittenintheformofanequation• Qa=a=bP whereQdisquantitydemanded• aisaconstant– determinedbynon-pricefactors• Pisthepriceoftheproduct• Forexample:• DemandforProductY=200– 4P• Thereforeifthemarketpriceis£40,thenQd=200– 160=40• Ifthemarketpricefallsto£20,thenQd=200– 80=120• I.e.afallinmarketpricecausesanexpansionofdemand
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LinearDemandFunction– ChangesinMarketPrice
• Thedemandfunctionfordailysalesoftakeawaypizzaisestimatedtobe• Qd=500– 5P(wherePisthe$priceofpizza)• Initiallythebusinesssetsapriceof$20foratakeawaypizza• Qd=500– 5(20)=400unitsperday• Followingariseincosts,thepizzacompanyraisestheirpriceto$25,otherconditionsofdemandremainingthesame(ceterisparibus)• Now:Qd=500– 5(25)=500-125=375• Highermarketpricecausesacontractionofdemand
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LinearDemandFunction– ChangesinNon-PriceFactor
• Thedemandfunctionfordailysalesoftakeawaypizzaisestimatedtobe• Qd=500– 5P(wherePisthe$priceofpizza)• Initiallythebusinesssetsapriceof$20foratakeawaypizza• Qd=500– 5(20)=400unitsperday• Followingachangeinrealincomesofconsumersthenewdemandfunctionis• Qd=800– 5P• Atapriceof$20,demandforpizzas=800– 5(20)• Newdemand=700.Ariseinrealincomehascausedanoutwardshiftofdemandforpizza.
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LinearDemandFunction– ChangesinCoefficient
• Thedemandfunctionfordailysalesoftakeawaypizzaisestimatedtobe• Qd=500– 5P(wherePisthe$priceofpizzaand5isthecoefficientofP)• Ifthemarketpriceofpizzais$20thenQd=400• IfthereisachangeinthecoefficientofPthiswillaffectthesteepnessofthedemandcurve• ThusifthenewlineardemandfunctionisQd=500-8P• Atapriceof$20,thenQd=500– 8(20)=340
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CompetitiveMarkets- Demand
IBSection1:Microeconomics