2 Price theory (p. 29-30)
2.1 Demand: The basis of the purchase decision
What is it that determines the demanded quantity of a commodity? For example, what are the factors that determine whether you buy a new snowboard next winter? What can influence your desision to buy a snowboard?
There are a number of possible answers to this question:
- The price is, of course, important for the decision to buy.
- The perceived utility that you associate with a new snowboard is also a central factor.
- The price of other goods (for example, skis, ski-passes, computers) will also influence your decision to purchase.
- Your income (or your assets) will also be a limiting factor.
- Your expectations for the future could also play a role. Do you expect your income to increase in the near future, or that the price of snowboards will fall drastically?
As you can see, demand depends on a whole range of influencing variables. The difficulties that are associated with this can be seen from the following question: How does the demand for snowboards change if their prices fall, if rail travel and petrol become more expensive, if incomes fall, if carving becomes absolutely "in" and if more snow falls during the winter?
This question either cannot be answered or can only be answered with great difficulty. We can only recognise the effects of the individual influencing factors if we consider them separately. We therefore work on the assumption that only a single factor changes while all the others remain the same. This assumption is used very frequently in economic analysis and is referred to by the Latin expression "ceteris paribus" (all other things remaining the same). Let us thereby initially limit ourselves to the one of the most important influencing factors: the price of the commodity in question. The question that we ask ourselves is therefore: How does the demand for a commodity in terms of quantity change if the price of this commodity changes? For this purpose, consider for a moment how many bars of chocolate you would demand per month at a price of Fr. 8.–, Fr. 7.–, Fr. 6.–, Fr. 5.–, Fr. 4.–, Fr. 3.–, Fr. 2.–, Fr. 1.50, Fr. 1.–, Fr. –.50, Fr. 0.– per bar.
The demand can be shown graphically in a price/ quantity graph. The price of the commodity is shown along the vertical axis, while the quantity of the commodity in demand is shown along the horizontal axis.
At Point P1, the price is so high that no more chocolate is purchased. M1 indicates the quantity that cannot be exceeded, even if the chocolate is given as a gift (saturation quantity).
Experience shows that the quantity of a product that is in demand will normally increase as prices fall – ceteris paribus – and, vice-versa, will reduce as prices rise.
2.2 The shift of the demand curve
"The demand for motorcycles has increased in Switzerland!" This statement is imprecise. It could actually have two meanings: 1. The quantity in demand may have risen as a result of a reduction in price. In this case, we are moving ON the demand curve. We have already looked at this case earlier. 2. The quantity in demand could also, for example, have changed as a result of a change in needs – motorbikes are "in". We thereby leave the ceteris paribus clause that we used above. What does this mean with regard to the demand curve? If the demand has increased due to a change in needs, this means that the demander are demanding more than previously at the same price. The demand curve therefore SHIFTS to the right. Increased income could also produce this effect. What is the situation in the case of price changes of other go