Demand and Supply Explained- Macro Topic 1.4 (Micro Topic 2.1)

Summary

In 'AC/DC Econ', Mr. Clifford explains the concept of demand through the example of milk consumption. He covers the law of demand, which states prices and quantity demanded are inversely related. The reasons behind this law include the substitution effect, income effect, and the law of diminishing marginal utility. Mr. Clifford also discusses how factors like taste, consumer numbers, related goods' prices, income, and expectations can shift the demand curve. He differentiates between changes in quantity demanded and changes in demand, emphasizing that only price affects the former, while the latter is influenced by five key shifters.

Takeaways

• 📉 The law of demand states that there's an inverse relationship between price and quantity demanded.
• 📈 As price decreases, quantity demanded increases, and vice versa.
• 🥛 A demand schedule shows how quantity demanded changes with price.
• 📊 The demand curve is a downward sloping curve representing the law of demand.
• 🔄 Three reasons for the downward slope of the demand curve are the substitution effect, income effect, and law of diminishing marginal utility.
• 🥛 The substitution effect explains why consumers switch to cheaper products when prices change.
• 💰 The income effect shows how price changes affect purchasing power and quantity demanded.
• 🔄 Diminishing marginal utility means each additional unit of a good consumed brings less satisfaction.
• 📉 A non-price change that affects demand is called a demand shifter, causing the demand curve to shift left or right.
• 🔑 Five determinants of demand are taste and preferences, number of consumers, price of related goods, income, and change in expectations.
• 🔄 A change in quantity demanded is a movement along the demand curve due to price changes, while a change in demand is a shift of the entire curve due to other factors.

Q & A

What is the law of demand?

The law of demand states that there is an inverse relationship between the price of a good and the quantity demanded. As the price decreases, the quantity demanded increases, and vice versa.

How does the substitution effect influence the demand for milk?

The substitution effect suggests that when the price of milk decreases, consumers will buy more milk and less of other, relatively more expensive products. Conversely, when the price of milk increases, consumers will seek substitutes and buy less milk.

Can you explain the income effect in the context of milk demand?

The income effect indicates that when the price of milk decreases, consumers' purchasing power increases, leading them to buy more milk. If the price increases, their purchasing power decreases, and they buy less milk.

What is the law of diminishing marginal utility as it relates to milk consumption?

The law of diminishing marginal utility suggests that as a consumer drinks more milk, the additional satisfaction or utility gained from each additional sip decreases. This is why the first sip is very satisfying, but subsequent sips provide less additional satisfaction.

How does the demand curve visually represent the law of demand?

The demand curve is a downward-sloping line that visually represents the law of demand, showing that as the price of a good decreases, the quantity demanded increases.

What are the three reasons behind the downward sloping demand curve?

The three reasons behind the downward sloping demand curve are the law of demand itself, the substitution effect, and the law of diminishing marginal utility.

How can a change in consumer preferences shift the demand curve for milk?

If consumer preferences change to favor milk more, such as a study suggesting milk improves school performance, the demand curve will shift to the right, indicating increased demand at every price level.

What is the impact of the number of consumers on the demand for milk?

An increase in the number of consumers, such as new customers moving to town, will increase the demand for milk, shifting the demand curve to the right.

How does the price of related goods affect the demand for milk?

The price of related goods, such as substitutes (like almond milk) or complements (like cereal), can affect the demand for milk. If the price of a substitute goes up, the demand for milk may increase, and vice versa. If the price of a complement goes down, the demand for milk may also increase.

What is the role of income in determining the demand for milk as a normal good?

For normal goods like milk, an increase in income leads to an increase in demand, and a decrease in income leads to a decrease in demand.

How does a change in expectations about future milk prices affect current demand?

If consumers expect the price of milk to decrease in the future, they may reduce their current purchases, leading to a decrease in demand. Conversely, if they expect the price to increase, they may buy more now, increasing the current demand.

What is the difference between a change in quantity demanded and a change in demand?

A change in quantity demanded occurs along the demand curve due to a change in price. A change in demand occurs when there is a shift in the demand curve itself, due to factors other than price, such as changes in consumer preferences, income, or expectations.