D. Demand Theory

1.  Demand by consumers

 a.  Individual demand

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b. Changes in demand

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c.  Determinants of demand

(1)  Income

(a) Normal good - more of the good is demanded as income or wealth increases

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(b) Inferior good - less of the good is demanded as income or wealth increases

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(2)  Prices of related goods

(a) Substitutes - use one good instead of another

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(b) Complements - use goods together

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(3)  Tastes and preferences

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d.  Market demand

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• Bandwagon effect - buy if others are buying

• Snob effect - don't buy if others are buying

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2.  Price elasticity of demand

• Measures responsiveness of buyers to changes in price

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a. Calculation

(1)  Point price elasticity

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(2) Arc price elasticity

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b.  Categorizing goods

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c.  Price elasticity and revenue

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d. Factors affecting the price elasticity

(1)  Availability of substitutes

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(2)  Definition of the market

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(3)  Adjustment time

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3.  Other elasticities

a.  Income elasticity

(1)  Point income elasticity

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(2)  Arc income elasticity

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(3) Categorizing goods

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b.  Cross-price elasticity

(1)  Point cross-price elasticity elasticity

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(2)  Arc cross-price elasticity

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(3) Categorizing goods

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4.  Using elasticities

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5.  International convergence of tastes

• Tastes becoming more similar around the world

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• Due to more rapid communication and more frequent travel

• Global middle-class lifestyle emerging - comfort, convenience, speed

• Companies need to develop global products, with some modification for local tastes

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6.  E-commerce

• Production, advertising, sale, and distribution of products and services from business to business (B2B) and business to consumer (B2C)

• Time and distance between buyers and sellers reduced dramatically

• Supply chains reorganized

• New selling methods - auctions

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a.  Impact on business

• Big reduction in cost of doing business

• Profit margins reduced due to more information and competition

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b.  Problems

• Information overload

• Security