1.2 Demand Flashcards
what is the formula for income elasticity of demand?
YED
Y= income
what does YED measure?
income elasticity of demand
how much quantity demanded will respond to a chnage in income
what is the YED value for inferior goods?
- the YED will be negative
- as income decreases, demand increases
what is the YED value for normal goods?
- will be positive
- as when income increases demand also increases
what are income inelastic goods? What is the range for YED?
- normal goods
*0< YED<1 - QD will increase by a smaller percentage than I
- seen as necessities
what are income elastic goods? what is the range for YED?
- normal good
- YED between 1 and ∞
- QD will increases by a larger % than Y
- seen as a luxury
what are inferior goods?
as income increases, the demand for the good decreases
YED= -
what are normal goods?
as income increases, demand for the good increases
YED=+
what are income elastic goods?
QD is very responsive to chnages in income
* luxury goods
YED from 1 to ∞
what are income inelastic goods?
when QD is unresponsive to chnages in income
* necessitiy goods
YED between 0 and 1
what is cross elasticty of demand (XED)?
how is the demand for good A affected by chnages in price of good B
what is the formula for (XED) cross elasticity of demand?
what type of good has an XED of 0?
unrelated goods
what type of good has a negative XED?
- complementary goods
- as price of good A increases, demand for good B will decrease
what are complemenatry goods?
- goods bought and used together
- if price of good A increases then demand of good B decreases
XED= -
what type of good has a positive XED?
- substitute goods
- as the price goes up for price A, demand for price B goes up
What are substitute goods?
- goods which can replace another
- if price of good A increases then demand for good B decreases
XED= +
what is the price mechanism?
the interaction of supply and demand to determine prices
what happens to the revenue when the price changes for a elastic demand good?
- price increases= revenue decreases
- price decreases= revenue increases
what happens to the revenue when the price of an inelastic demand good changes?
- price increases = revenue increases
- prices decrease= revenue decreases
how is revenue affected by unitary price demand?
no relationship/ correlation
* as price increases/decreases revenue stays the same
what is demand?
being willing and able to buy something
draw the demand curve
inverse realtionship between quanitty demanded and price
What is an extension in demand
When prices decrease……there is an expansion in demand
Assuming ceteris Paribus (other factors like competitors ignored)
What is a contraction in demand ?
If price increases…l there will be a contraction in demand
What will happen to the demand curve if there is an increased amount of advertising?
More advertising means more demand for the same price, so there will be a shift outwards in the demand curve
Define demand
The quantity of a good or service purchased at a given price over a given time period
what are the two assumptions in econimics ?
- consumers wish to maximise utility
- firms wish to maximise profit
what factors cause shifts in the demand curve?
conditions of demand
- seasons (christmas trees)
- price of other goods (substitute/complementary )
- Changes in taste and preferences: advertising, fashion & trends
- Changes in population and age structure (larger population - more migration / more older people)
- changes in income (can afford more)
SOAPI
what are normal and inferior goods?
- inferior: when icome increases demand decreases
- basic goods (ms mollies)
as income increases, demand decreases, shifting demand out ot the right - normal : as income increases, demand increases
how do substitute goods and complinentary goods affect demand
CAUSE MOVEMENTS OF CURVE (EVEN THO PRICE RELATED)
* Substitute goods : inversley proprtional (apple & samsung)
* complimentary goods : propetional (iphone+ apps)
what is price elasticity of demand (PED)?
measures how much quantity demanded will respond to a chnage in price
what is the formula for PED?
%Δ Quantity Demanded/ %Δ Price
what does it mean when the PED value after the negative sign is larger than 1?
this means that the PED of elastic - very responsive to changes in price
what does it mean when the value of PED after the negative sign is smaller than 1?
0.7, 0.1
the Qd is smaller than p, suggesting that it is inelastic, suggesting that they are unreactive to the chnage in price
what happens when the PED is exactly -1?
the change in price gives the same chnage in quantity demanded.
unitary elastic demand
define elastic demand and inelastic demand
- elastic: demand is very responsive to changes in price
- inelastic demand: when demand is unresponsive to chnages in price
*
what does an elastic demand curve look like?
very horizontal
what does an inelastic demand curve look like?
very vertical
what is perfectly inelastic?
when the PED is excatly 0
vertical I for inelastic
what are some examples of perfectly inelastic goods?
- drugs for drug addicts
- life saving medicine
what is perfect elasticity?
if prices chnaged at all literally no one would buy. Consumers are extremly responsive.
PED at negative ∞
horizontal
what does unitary demand curve look like?
which factors affect Price Elasticity of Demand?
- necessity/luxury good
- addiction/habit
- availability of substitutes
- brand loyalty
- proprtion of income
- time period
NASBIT
out of necessities and luxuries which are inelastic and elastic?
necessities= inelastic
luxuries= elastic
what PED are addiction goods and habit goods (games, junk foods)?
inelastic
how doe availbility of substitutes affect?
the more substitutes, the more elastic the price will be
how does brand loyalty/brand image affect elasticity
- more brand loyalty= more price inelastic (ferrari)
- less brand loaylty/imaginne= more price elastic (NIssan)
how dos proportion of income affect elasticty?
- the larger the proprtion in your income, the more cautions, so more price elastic
- the smaller the proportion in income the more price inelastic
how does time affect price elasticity?
- the less time given (short run), the more price inelastic
- the more time given (long run) , the more price elastic, time to consinder substitutes
What is joint demand ?
Describes the relationship between complementary goods. (As demand for x increases demand for y decreases)
What is competing demand ?
Describes the relationship between between substitute goods
What is composite demand?
Demand for a good which has two uses
What is derived demand ?
Demand for a good which is used in the production of other goods.
eg: milk
what is effective demand?
when some can buy is and also affford it
useful demand
describe the marginal benefit curve
marginal benefit curve= demand curve
* the price shows the marginal benefit
* maximum price willing to pay for a qyantity of a good (marginal benefit )
what is the law of dimishing marginal utility?
as the consumption of a good increases, the marginal utility from an additional unit decreases
downwards sloping demand curve
what is marginal utility?
the additional benefit recieved from consuming an extra unit of a good
define demand
the quantity of a goood or services purchased at a given price over a given time period
excess demand
when the price is set too low so demand is greater than supply
