Theory of Demand~~~~ Part 1

Note: This is a VERY long chapter that includes many other mini-topics, so I 'might' split it into two posts~~~

Ceteris paribus- If all of the other factors were kept constant.
Substitute goods- An alternative good or goods that are competitive in demand.
Complement goods- Goods in joint demand
Demand, or dd for short, is the quantities of G&S that consumers are willing AND able to buy at varying prices over a period of time, if ceteris paribus was applied.

Factors that determines the dd, Price of G&S, financial ability to pay, attitude towards the product, availability and attitude towards the G&S and population.

How do they determine the quantity of demand???
Price of G&S- Considering ceteris paribus, the lower the price of a G&S, the higher the quantity of demand (Qd). If a price of a product was lower, than more people would be able to afford it. For example, if Mark budgets were $10, and he wish to buy a bar of chocolate that cost $6 each, he could only afford one bar of chocolate. However if the bar of chocolate was lower, $5 each, Mark can now afford to buy TWO bars of chocolate(good for Valentines, eh? XP), thus an increase in Qd.
If the price of the G&S is lower than the substitute product, than people change from buying it's substitute or visa versa.

Credits to Wiki~~~.
If the price of Coca-Cola were to increase from P1 to P2, the Qd would decrease from Q1 to Q2. Pepsi, being it's substitute, would have a shift in the Demand Curve to the right. This shifts shows that, even if Pepsi were to maintain it's original price, the Qd would increase.

A shift in the Demand Curve would be caused by factors other than cost.

Financial ability to pay- Strictly speaking, no money, no talk. If there is an increase in income, than the consumers would have more buying power, thus an increase in dd. This will cause a shift in the dd curve. This means that, given that the product maintains it's price, the Qd would increase. However some firms may take advantage of this and increase the price of their G&S in away that the Qd would still remain the same even AFTER the increase from P1 to P2. Ceteris paribus is applied.

For every given price, there is an increase in Qd

Attitude towards the product- This refers to our preferences for the G&S which in influenced by the quality and reputation of the product.

Availability and attractiveness- This involves substitute goods and complement goods. How substitute goods affects the DD curve was stated before. Complement goods also affects the DD curve. This is because when buying one product, there is demand for it's complement goods. For example, by buying a full drum set, there is demand for drumsticks, the complement good.

Population- Assuming there is an increase in population, there will also be an increase in demand. Logical...


As we have seen, the DD curves has all been downward sloping, but there are some cases where the DD curves are upwards sloping, where the higher the price, the more the Qd. These normally applies to Speculative goods and Goods with snob appeal.

Speculative goods- If consumers notices the price increasing, they may assume the price would increase further in the future, so they buy more. If the price decreases, they may start to sell. For example, Samuel notices that the price of wood is increasing, thus he buys as many as he can before it reaches at a price where he can't afford. With this, he can sell his furniture's at a higher price(inflation). However, the moment he realizes the price of wood decreases, he starts selling his furniture's before they lose their value.

Proof from 'Economics' by Anderton

Goods with snob appeal- This refers to branded goods such as Rolex. Since they are branded, they confer status on the buyer. Since they are expensive only a few can afford them. However if the price were to decrease, more people can afford them and the G&S may have lost it's prestigious, giving it a downward slope DD curve

In my opinion, it is very important to see the trend of prices, whether increasing or decreasing, as it may determine what you wish to buy, taking into factor of ceteris paribus.

In conclusion, there are many factors that affects the DD curve and each has their own amount of impact on Qd, ceteris paribus.

Money Money MO~~~NEY!!!

There are four requirements to, what is consdered as money.

• Medium of exchange- In the olden days, the 'barter' system was used where people would trade their goods for others. For example, guy A wishes to 'buy' guy B's box of apples, in return guy A would give guy B his precious fighting rooster as there was no medium to exchange these G&S. This is where money comes in, as it acts as a medium that is acceptable as a means of payment for G&S. This solves the problem of losing your precious fighting rooster!

My~~~ pre~cious chicken~~!!!!!!!!!!!!!!

• Unit of account- During those days, it was tough to determine the values of G&S. However, money is able to establish this value. Example, a box of apples would cost $5 where a rooster would cost $10. This might cause problems to those who still follow the barter system...

Time has changed. Give me two boxes of apples.

• A store value- Unlike the rooster that can die of diseases or apples that can rot, money can be stored easily and maintain it's value for many years. Because of this, it is very convenient to those filthy rich people as they don't need anchors of farms to store their wealth.

• A standard of deferred payment- With money, you will be able to pay for you G&S on credit, (payment made after receiving the G&S). If barter system were still around, it would be a big risk for those who receive their G&S later on as the goods returned may have lost it's value.

Inflation

Inflation is where there is an increase in the prices of most G&S, and this will affect the four requirements of money.

Medium of exchange- Though the possibilities of inflation having an impact on medium of exchange is low, it is still possible(only when the country is undergoing hyperinflation). This may cause the people to adopt other countries currency and abandon their own countries currency.

Unit of account- The value of G&S would increase over time, due to it's improvement in quality. However, when inflation kicks in, it would be difficult to determine the original price of the G&S and how much of the increase in price was due to inflation or the quality of the G&S.

Store value- People would be discourage to make savings as the value or the people's buying power decreases, if inflation rate is higher than the savings rate. For example, John saves $100 which could have been used to buy a house, but because of inflation, that $100 cannot even be used to stay at a hotel for a night.

If savings were to fall, the bank may need to increase their interest rates, but this would than discourage firms to borrow money from the bank as they would now need to pay back more.

Standard of deferred payment- Inflation may cause the value of the money that is to be given at the end of the credit period to decrease. This would discourage people to make credit payments. However, most firms has handled this problem by including a clause in the loan contracts if an inflation were to occur, such as creditors to charge higher prices.

In my opinion, money is able to solve many problems that were faced during the past such as uncertainty of values of G&S, bringing your cows across town and the worry of your credit G&S to have lose it's value by the time it comes into hand. However, people will need to be aware of the risks of inflation to money and adept to the effects of inflation, like most firms has with their special clauses in loan contracts.

In conclusion, money, with it's four main functions, is an important factor in our daily life.

Special note, pictures were taken from Google Images and I do NOT own any of it. Big thanks to Google. :D