Essay Plans
Why does the demand curve slope upwards from left to right? Are there any exceptions to this rule?
SYNOPSIS:
This essay is divided into two unequal sections:
| a. | The shape of the demand curve | Marginal utility Indifference curve analysis Revealed preference theory |
| b. | Reasons for pervisity | Inferior goods Goods of ostentation Expected price changes in the future |
POINTS:
- The theory of demand states: at higher prices a lower quantity of goods/services will be demanded than at lower prices other things being equal.
- These 'other things' are the non-price determinants of demand:
Income
Tastes and preferences
Prices of related goods: substitute and complements
Changes in expectations about future relative prices
Population - Care should be taken to include a sentence about RELATIVE PRICES: we are not concerned with prices in isolation but prices in relation to all other goods. If a textbook rises by 5% but demand does not fall this could be because inflation was 25% thus relative prices fell.
- There would not be time for explanation or marginal utility AND indifference curves AND revealed preference. Choose one and explain it thoroughly. If marginal utility use numerical formulae plus total and marginal utility diagrams; if indifference analysis use diagrams and explain clearly the income and substitution effect.
- Exceptional demand curves: ostentation - fur coats etc.
A diagram is essential. Show - using real examples if possible - that whether the total demand falls depends on how far the price falls and how large the lower income group is (to which the market had been widened). Perception or snobbery is also important is if people THINK that others may now buy the product (even if they do not) then demand may fall. In Economics seminars last year run by Marketing Education Services and the Oxford School of Learning students were asked if they would come next year if prices FELL; the majority said no as this would lead them to believe the goods/service was too inadequate. Thus for many price equals quality with goods of ostentation, price equals exclusivity as well as quality.
- Exceptional demand curves: speculation. If shares rise (a Bull market) demand may increase.
- Exceptional demand curves: inferior goods. If potatoes are an essential part of your diet and the price falls, the real income effect may lead people to buy something more expensive and tastier (See Giffen goods).
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