2.1 markets-demand Flashcards
what determines price
the interaction of consumers and producers determine the price of each product
definition of market
market: any arrangement where the buyers and sellers interact to carry out an economical transaction.
definition of demand
demand: the relationship between various possible prices of a good and the corresponding quantities that consumers are willing and able to purchase per time period, ceteris paribus.
law of demand
- the relationship between price and quantity per period of time is inverse. meaning that if the price increases, then quantity demanded will decrease as consumers will be willing and able to buy less per period.
- the law of demand states that if the price of a good rises, then the quantity demanded per period will fall, ceteris paribus.
2 effects that explain why an increase in price follows with the decrease of quantity demanded.
substitution effect
income effect
substitution effect
- if the price of a good rises, the good will now cost more than alternative or substitute goods.
- all other goods automatically become relatively cheaper and so people will tend to switch to said substitutes.
income effect
- if a price of a good rises, consumers feel poorer as they are unable to buy as much of the good with their income.
- the purchasing power of their income(“real income”) falls and people tend to buy less of that good.
law of diminishing marginal utility
a typical consumer has a fixed set of income and faces a fixed set of prices. we assume that consumers allocate their expenditures among all the goods and services that they might buy so as to gain the greatest possible utility. this means that the goal of typical consumers is to maximise their utility subject to their budget constraint(income)
- as one consumes additional units of a good per period, the additional satisfaction enjoyed decreases.
- individuals will be willing to pay less and less to buy more and more unit is of a good per period of time.
utility
utility: a measure of the satisfaction derived from consuming a good or service
marginal utility
marginal utility: the additional satisfaction / the extra or additional utility derived from consuming an additional unit of a good or service.
demand curve(what it illustrates and purpose)
- the demand curve illustrates the relationship between the price of a good and the quantity of the good demanded over a period of time
- it can be for an individual consumer or more usually for the whole market.
- market demand derives from adding up at each price, the quantities demanded by all consumers in a market.
movement along the demand curve: when the price of the good changes
shift of the demand curve: when any of the non-price determinants of the demand curve changes.
movement along demand curve
movement along the demand curve: when the price of the good changes
shift in demand curve
shift of the demand curve: when any of the non-price determinants of the demand curve changes.
non price determinants of demand (5 examples)
- are factors other than the good’s price that can affect demand.
- they are the factors assumed to be constant under the ceteris paribus assumption.
e.g.
income,
price of related goods,
tastes and preferences,
expectation of future price changes,
number of consumers
how does income affect demand
- income: when income increases, demand of _____(YED)
- normal goods ^
- inferior goods v
- luxury goods ^
how does price of related goods affect demand
- substitute goods: two goods are considered substitutions of they are in competitive consumption and consumers typically buy one of the other as goods satisfy the same need
- complement goods: “ consumers together (“jointly consumed”), pb&j, coffee&sugar. increase in demand of one leads to increase demand of other.
how does tastes and preferences affect demand
if good appears more attractive to customers as a result of advertising, fashion trends, or health considerations, then demand for that good will increase and the demand curve will shift to the right.
how does the expectation of future price changes affect demand
if the price of a product is expected to rise in the future, then its demand will now increase and the demand curve will shift right
how does number of consumers affect demand
if the number of consumers in a market increases, demand will increase and the demand curve will shift to the right, and vice verse.
demand schedule
a table that shows the qty demanded of a good or service at different prices
individual demand
demand of one person
market demand
sum of all the individual demands for a good or service in a market at each price
demand curve (what does it show +axes)
shows the inverse relationship between price and qty
y-axis -> price
x-axis -> qty
characteristics of competitive market
(5)
- rivalry
- independent actions by buyers and sellers
- buyers compete wit one another (dollar votes)
- increased competition -> decrease in seller’s market power and control over price
- forces of supply and demand determines price
assumptions underlying law of demand (3)
income effect
substitution effect
diminishing marginal utility
real income
income of individuals or countries after adjusting for inflation (price level changes)
substitute goods (2 kinds)
goods that have similar characteristics and uses to consumers
close substitutes and remote substitutes
close substitutes
goods that have very similar characteristics and uses to consumers so that they will switch between them easily
remote substitutes
goods that have less similar characteristics and uses to consumers. consumers switch between them less easily
complements/complementary goods (def+2 kinds)
goods that are consumed together
close complements and remote complements
close complements
goodsthat are consumed together, such that one good has little use without the other
remote complements
goods that are sometimes consumed together, but consumption of one good does not depend on the other
