2.1: Demand Flashcards
What is a market
An arena, physical or conceptual where goods and services are traded either through barter or currency
Demand
Referring to the willingness and ability of the consumer to buy a product at a particular price in a given time period
Price
Amount paid by customer to purchase good or service
Law of demand
- Ceteris paribus, the quantity demanded of a good or service will fall as it’s price rises, and vice versa.
- describes the negative relationship between price and quantity demanded
Assumptions underlying law of demand
- income effect
- substitution effect
- law of diminishing marginal utility
Income effect
Ceteris paribus, as the price of a good or service rises while income is held constant, the consumer can now afford a smaller quantity
Substitution effect
Ceteris paribus, as the price of a good rises while a substitute good’s prices remain constant, the rational consumer will likely be incentivized to shift to a cheaper alternative
Law of diminishing marginal utility
- The more of a product customers consume, the less they will spend on additional unit.
- eventually the utility will diminish to the point where customers will not want be willing to purchase any more
Utility
Usefulness or satisfaction derived from a product by a consumer
Demand curve
Illustrates the inverse correlation between price and quantity demanded of a product over a period of time
Quantity demanded
The amount of a good or service demanded at a certain price limit
Market demand curve
- sum of all individual demand for a product at each price level
- found by adding up individual demand at each price level
Non-price determinants of demand
Various factors other than price of the good or service that affect demand and shift the demand curve
What are the non-price determinants of demand
R - related products (substitutes and compliments) I - income P - preferences and tastes E - expectations of future prices N- number of consumers
(Acronym RIPEN)
Income as a non price determinant of demand
Higher levels of income makes customers more willing and able to buy more products, owing to greater purchase power, Ceteris paribus
Normal goods
Products that have a higher demand when real income increases
Inferior goods
Products that have a decrease in demand when income rises
Tastes and preferences as non price determinants of demand
- products becoming fashionable or trendy = increased demand
- individual emotional preferences
Future price expectations as non-price determinants of demand
If consumers expect price to rise in the future, demand will increase in the present. If consumers expect prices to fall in the future, demand at present will decrease.
Capital gain
The positive difference between the price paid for an asset and the assets market value
Price of related goods as a non price determinant of demand
Sales of one product pacts the demand of another product
Complimentary goods
- Products jointly demanded as they go well together.
- A change in price of one product negatively effects the demand of the related good
Substitute goods
- products that are in competitive demand and serve as alternatives to one another
- change in price of one has a positivity affect on demand for the other
Number of consumers as a non price determinant of demand
If the number of consumers in a market increase, the demand will increase
Contraction
Movement along the demand curve caused by price increase
Extension
Movement along the demand curve caused by the price falling
Assumptions of rational consumer theory
1) all consumers are rational
2) all consumers possess perfect information about all prices, all substitute products, all raw materials and components used, all business practices etc
3) all consumers are driven by the incentive to maximize utility
Limitations of rational consumer theory
- biases
- bounded rationality
- bounded self control
- bounded selfishness
- imperfect information
