2.2 Demand Flashcards
How is the price of a good determined?
determined by the interactions of many sellers and buyers, through the forces of demand and supply
Define ‘demand’
the various quantities of a good or service a consumer is willing and able to pay at a given price within a given time period, ceteris paribus
Define ‘ceteris paribus’
all things other than price (which can affect how much the consumer is willing and able to pay) are kept constant
What is the law of demand?
there is a negative relationship between price and quantity demanded over a particular time period, ceteris paribus:
- as the price of a good increases, quantity demanded decreases, ceteris paribus
- as the price of a good decreases, quantity demanded increases, ceteris paribus
Define ‘market demand’
the sum of all individual demands for a good which is presented on a demand curve
What are non-price determinants of demand?
variables other than price that can influence demand
What is a rightward shift called and what does it suggest?
indicates that more is demanded at the same given price = increase in demand
what is a leftward shift called and what does it suggest?
indicates that less is demanded at the same given price = decrease in demand
Describe ‘Income (normal goods)’ as a determinant
consumer income increases =
demand increases for normal goods
(rightwards shift + shortage)
consumer income decreases =
demand decreases for normal goods
(leftwards shift + surplus)
Describe ‘Income (inferior goods)’ as a determinant
consumer income increases =
demand decreases for inferior goods
(leftwards shift + surplus)
- will buy more expensive alternatives/luxury goods
consumer income decreases =
demand increases for inferior goods
(rightwards shift + shortage)
- second hand cars and clothes
Describe ‘tastes and preferences’ as a determinant
good become popular/preferred =
demand increases
(rightwards shift + shortage)
good becomes less popular/less preferred =
demand decreases
(leftwards shift + surplus)
Describe ‘future price expectations’ as a determinant
if they think the price will increase in the future
demand increases now
(rightwards shift + shortage)
if they think the price will decrease in the future
demand decreases now
(leftwards shift + surplus)
Describe ‘substitues’ as a determinant
if the price of good X increases, the demand for Y increases
if the price of good X decreases, the demand for Y decreases
if the price of Y increases, the demand for X increases
if the price of Y decreases, the demand for X decreases
Describe ‘complementary goods’ as a determinant
if the price of good X increases, the demand for Y decreases
if the price of good X decreases, the demand for Y increases
if the price of good Y increases, the demand for X decreases
If the price of good Y decreases, the demand for X increases
Describe ‘number of consumers’ as a determinant
increase in number of consumers = increase in demand
decrease in number of consumers = decrease in demand
What is a movement along a curve and when does it occur?
a change in price = change in (quantity) demanded which is shown as a movement on the demand curve
What is a shift along a curve and when does it occur?
a change in a non-price determinant = change in (demand) which is shown by a shift of the entire curve
define ‘total utility’
the total satisfaction that consumers get from consuming something
Define ‘marginal utility’
the extra satisfaction that consumers receive from consuming one more unit of a good
What happens to total utility and marginal utility as you continue to consume more of a good
as consumption of a good increases, total utility increases, however, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed.
why does ‘marginal utility’ decreases
the satisfaction that consumers get from consuming more and more units of a good decreases
How does the law of diminishing marginal utility relate to the law of demand
since consumers derive less and less utility from each extra unit of a good, they will only buy additional units when the price of the good falls. This is to maximise the total utility they derive.
What is the income effect and how it relates to the law of demand
a fall in price = increase in real disposable income and consumer’s purchasing power, leading to an increase in quantity demanded
an increase in price = decrease in real disposable income and consumer’s purchasing power, leading to a decrease in quantity demanded
What is the substitution effect and how it relates to the law of demand
a fall in price = consumers will buy more and quantity demanded increases for this substitute
