2.2 Demand Flashcards
What is meant by demand?
The willingness and ability to purchase a good or service at the given price in a given time period.
What is derived demand? Give an example.
Demand that comes about due to demand for another product. For example, demand for popcorn at a cinema depends on the demand for movie tickets.
What is the law of demand?
The quantity demanded is inversely proportionate to the price of a good or service.
How is a demand curve generally drawn?
The demand curve slopes downwards and is plotted between price (y axis) and the quantity demanded (x axis). The demand curve has to be labelled with a ‘D’.
What is individual demand?
The demand for a good or service by an individual consumer. It doesn’t show us the actual amount bought since we don’t know anything about the supply.
What is market demand?
The total demand for a good or service found by adding together all the individual demands.
What is a movement along the demand curve and why is it caused?
It is caused by change in price (due to a change in supply) which leads to a movement up or down the existing demand curve.
What would happen to the demand diagram if prices change?
If prices fall, there would be an expansion (more) demand. This would cause a movement down the curve.
If prices rise, there would be a contraction (less) demand. This would cause a movement up the curve.
For movements along the demand curve, what is the correlation between price and quantity?
They move in opposite directions.
If there is rise in the price of a good or service, how would it affect the consumer and firm?
Consequence
Rises in price of a good or service lead to a fall in quantity and demand. Consumers would buy fewer goods and therefore sales and profits would fall.
What is a shift along the demand curve and why is it caused?
It is caused by non-price factors and this leads to a complete movement of the existing demand curve either to the right or to the left.
What are factors that cause a shift in demand?
PASIFIC
- Population
- Advertisement
- Substitutes
- Interest rates
- Fashion/tastes
- Income (disposable)
- Complements
What is a substitute? Give an example.
A good or service that can be used as a replacement of another. For example, Pepsi and Cola.
What is a complement? Give an example.
A good or service that can be bought or used together. For example, fish and chips.
For shifts along the demand curve, what is the correlation between price and quantity?
Mostly price and quantity will move in the same direction.
What happens if there is a leftward shift (decrease) in demand?
Price and Quantity
Both price and quantity fall.
What are some exceptions to the positive correlation between price and quantity for shifts in demand?
- If a substitute is preferred, demand will fall even if prices fall
- Increases in demand can allow a firm to gain economies of scale so they can cut prices
- Incomes can rise faster than prices so consumers may demand more
What is price elasticity of demand (PED)?
The responsiveness of quantity demanded to a change in price of the product.
What is elastic demand?
When price is changed, it leads to a larger change in quantity demanded.
What is inelastic demand?
When price is changed, it causes a minor change in quantity demanded.
How is PED calculated?
% change in quantity demanded ÷ % change in price
How is percentage change calculated?
(Difference ÷ original) × 100
What does a PED value of 0 mean?
That demand is perfectly inelastic and that there would be no change in demand if prices are changed.
What does a PED value between 0 and 1 mean?
That demand is inelastic and change in demand is less than the change in price.
What are 3 examples of inelastic goods?
1) Petrol
2) Cigarettes
3) Coffee
What does a PED value of 1 mean?
That PED is unitary price elastic and the change in price will lead to the exact change in demand.
What does a PED value of greater than 1 mean?
That the good or service is elastic so the change in quantity demanded is higher than the change in price.
What does a PED value of ∞ mean?
That PED is perfectly price elastic meaning that an infinite amount can be demanded at a given price (so price shouldn’t be changed at all).
What factors can affect PED?
- Time
- Income
- Nature of good (addictiveness)
- Brand loyalty
- Competitor pricing
Why is PED important for consumers?
1) The government can increase taxes if PED for a good or service is inelastic.
2) Consumer’s PED can depend on the weather and time of year for example.
Why is PED important for producers?
1) Allows producers to maximise their revenue such as charging more for inelastic goods.
2) Can charge different prices to different groups of consumers.
What are some evaluative points for the importance of PED?
- Figures are forecasted so may not be accurate or reliable
- PED might change: short term vs long term
- Limited if data is obtained from the past
- Price may not be as important as quality
