2.2 - Demand Flashcards
What is a market?
A set of arrangements that allows transactions to take place.
What is demand?
The quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.
What is Derived Demand?
Demand for a factor of production or good which derives not from the factor or good itself but from the goods it produces.
What is Compound Demand?
Demand for a good that has multiple uses.
What is Joint Demand?
Demand for goods that are interdependent, such that they are demanded together (complementary goods may be in joint demand).
What is Competitive Demand?
Demand for goods which are in competition with each other (substitutes)
What two effects are witnessed when the price of a good rises?
Income effect and Substitution effect
What is the Substitution effect?
An increase in the price of a good will encourage consumers to buy alternative goods. The substitution effect measures how much the higher price encourages consumers to use other goods, assuming the same level of income.
What is the Income effect?
How the price change effects consumer income. If price rises, it effectively cuts disposable income and there will be lower demand.
What is an expansion?
Movements along the demand/supply curve resulting in an increase in demand/supply.
What is a contraction?
Movements along the demand/supply curve resulting in a decrease in demand/supply.
What are the factors that can shift demand?
Population Advertising Substitutes Income Fashion and trends Interest rates Complementary goods
What does demand have to be in economics?
Demand has to be effective. Consumers have to be willing and able for demand to exist.
What is the law of demand?
There is an inverse relationship between price and quantity demanded. As price increases, Qd decreases and vice versa.
What do we assume in the law of demand?
Ceteris Paribus, all other things being equal.
What explains the downward slope of the demand curve?
The income effect and the substitution effect.
What do non-price factors do the the demand curve?
They shift the demand curve, completely independent of price. Demand either extends or contracts, but importantly at the same price, P1.
What is the mnemonic for the factors that shift the demand curve?
PASIFIC
What does the P stand for in PASIFIC?
Population. A greater population will increase demand and vice versa.
What does the A stand for in PASIFIC?
Advertising. Good advertising can increase willingness to buy a good. Bad advertising, such as a bad report or review, can decrease the demand and willingness to buy the good.
What does the S stand for in PASIFIC?
Substitute’s price. If the substitute’s price (Good Y) increases, demand will increase for Good X. Vice versa.
What does the I stand for in PASIFIC?
Income. Normal good or inferior good?
What is a Normal good?
As incomes rise, demand for normal goods will increase. They can be goods such as cars, designer clothing and fine dining.
What is an Inferior good?
As incomes decrease, demand for inferior goods increase. They can be goods such as fast food and holidaying at home.
What does the F stand for in PASIFIC?
Fashion/Tastes. Affects willingness to buy. If fashion moves towards the good or service, the demand curve will shift to the right. If fashion moves away from the good or service, the opposite occurs.
What does the 2nd I stand for in PASIFIC?
Interest rates. If consumers need to borrow in order to buy the good. Housing, cars and some holidays. If interest rates fall, demand for these goods may rise. If interest rates rise, so it costs more to borrow, the consumers will not demand as many.
What does the C stand for in PASIFIC?
Complement’s Price. A complementary good is a good that is often bought with another. If the complement’s price increases, demand may fall causing the demand curve to shift to the left.
