2.2 Demand Flashcards
Demand
The willingness and ability to purchase a particular product at given price at a given point in time
Law of Demand
Demand and price generally have an inverse relationship
Contraction in Demand
- movement up the demand curve
Extension of Demand
- movement down demand curve
Inelastic Demand
Demand curve is more vertical, changes in price do not affect demand too much (essential good?)
- Price and Revenue both go up
- good may also be cheap so it is not worth for consumers to shop around
- PED between -1 and 0
Elastic Demand
Demand curve is more horizontal
- may be large amount of substitutes for product
- revenue will decrease when price increases
- PED between -1 and -infintiy
Factors that can lead to a shift in the demand curve
- income
- tastes + preferences
- Availability of substitutes and complements
- Advertising
- Seasonal Changes
- Pop size + demographic
- Expectations of future price changes
- State of the economy as a whole
PED
- responsiveness of quantity demanded to changes in price
- PED = Q2 - Q1 / P2-P1 x 100
Unitary Price Elastic Demand
- PED = -1
- Changes In price are proportionally the same
Consequences of changes in demand
- price and quantity move in opposite directions
- movement up the demand curve means consumers can buy fewer goods and services reducing SOL and looking for cheaper subs
- movement up demand curve for producers means lower sales and profits, which means output may reduce and workers may become unemployed
- depends on eslaticty of demand
Consequences of shifts in demand
-if price of good rises but income rises faster, consumers will still demand more of the good
- An increase in demand may allow producers to use economies of scale, meaning lower price or higher profit
- Fall in market demand means firms go out of business
Effect of PED on consumers
- if inelastic may be taxed as it is an essential or they can afford it anyways
- may not care about price, more about quality
- seasonal changes
Effect of PED on producers?
- knowledge of PED can influence producers whether to increase price or not (if inelastic then yes)
- This can maximise total revenue
- different groups of people will be charged different prices
- PED can be indicative of level of competition and substitutes so they may not supply product
Evaluating PED
- Difficult to measure as may have a small sample size that doesn’t reflect anyone
- Can change over time
- Care more about quality than price
- A producer may not care about maximising profit if he wants to gain market share, make an economies of scale or likewise
