2.2 Demand Flashcards
What is demand ?
demand is the willingness and ability of a buyer in a market to purchase a good or service at a given price in a given period of time
What is effective demand ?
a buyer must be willing and able to buy at a given price to be considered part of effective demand in a market
What is the law of demand ?
- the quantity demanded will usually increase as price falls, and the quantity demanded will usually fall as price increase, ceteris paribus
- it Indicates an inverse relationship between price and quantity demanded
What makes up the demand function ?
The demand function indicates the quantity demanded depends on demand conditions:
- price of the product
- income of the buyer
- price of substitute products
- price of compliments
- tastes and preferences of buyers
- expectations of buyers
- all over time
What is price elasticity of demand
- Price elasticity of demand (PED) measures the responsiveness of quantity demanded of a good/service to a change in price
- PED = %change in QD/ %change in Price
- PED is almost always negative
What is the income (+wealth) effect ?
- income effect - the effect of a change in price on quantity demanded arising from the buyer becoming better or worse off as a result in a change in price
- an increase in price leads to buyers becoming worse off as their income now buys less, this is likely to lead to a contraction in demand
- a decrease in price in price leads to buyers becoming better off as their income buys more leading to an extension in demand
What is the substitution effect ?
- the substitution effect is the effect of a change in price on quantity demanded arising from the consumer switching to or from, alternative products as a result of a change in price
- rise In Price leads to consumers being more likely to switch to buying a substitute good, leading to a contraction in demand
- a decrease in price has the opposite effect
What do different PED’s look like on the demand curve ?
What does a shift in the demand curve show ?
- A shift to the right of the demand curve, shows an increase in quantity demand at any price, as a result in a change of a non-price factor
- A shift to the left of the demand curve, shows a fall in quantity demanded at any price, as a result in a change of a non-price factor
What are normal goods ?
- products that have a positive relationship between income and quantity demanded are called normal goods, (QD increases with an increase in income)
What are inferior goods ?
- some products have a negative relationship between income and quantity demanded, these are called inferior goods ?
- QD falls with an increase in income, visa versa
What is competitive demand ?
competitive demand, demand for goods that are in competition with each-other - substitutes are in competitive demand (bus and rail)
What is joint demand ?
joint demand - goods which are interdependent / demanded together
What is the law of diminishing marginal utility ?
- the law of diminishing marginal utility states that as more units of a good are consumed, successive units will bring a smaller additional utility