1.2.2 Demand Flashcards
What is demand
is the quantity of good/services consumers are willing and able to buy at a given price in a given time period
What is effective demand
when a desire to buy a product is backed up by an ability to pay
What is derived demand
Demand for a factor of production used to produce another good or service
What is the two laws of demand
inverse relationship between price of a good and demand 1) As prices fall, we see an expansion/extension of demand 2) As prices rise, there will be a contraction of demand
Why is Ceteris Paribus assumption, important when drawing a demand curve
Economist assume all factors are held constant except one - the price of the product itself Helps us isolate variables
What is a demand curve
Shows the inverse relationship between price of an item and the quantity demanded over a period of time
What are the two reasons why more is demanded as price falls
The income effect The substitution effect
Explain the income effect, in terms of a reason why more is demanded as price falls
Consumers can maintain the same consumption for less expenditure, effectively increasing ‘real income’ Provided the good is normal, some of the increase in real income is used to buy more
What is a normal good
one for which demand rises with income rises, and demand falls when income falls
Explain the substitution effect in terms of a reason why more is demanded as price falls
price fall = product is relatively cheaper than alternatives (assuming ceteris paribus) Some consumers will switch their spending from alternative good or service The more substitutes and lower cost of switching, the bigger the effect
How does the Law of diminishing Marginal Utility explain the inverse relationship between price and quantity demanded
- As more of a product is consumed , the additional utility from each extra unit consumed will fall Consumers are considered rational, not pay more for a good than the utility it provides
Describe a demand curve
What is on the X axis
What is the lable on the curve
What are the lables on the line from the demand line towards the axises
A change in the price will cause what to a demand curve
cause a movemnt along the demand curve
What 8 factors will cause a shift in the demand curve
‘non-price factors’
- Changing prices of subsitute good/service (Competitive Demand)
- Changing prices of complements (joint demand)
- Changes in real income of consumers
- Distribtionof income
- Advertising and marketing
- Intrest rates
- Age and structure of a population
- Seasonal Factors
- Social/Economic Factors
What is joint demand
demand for one product is positively related to demand for a related good/service
Two completments are siad to be joint in demand
