4. Demand Flashcards
Demand
Quantity consumers are willing to buy at a given price
Basic law of demand
The law of demand states that when the price of a product goes up, the quantity demanded will go down
ceteris paribus
The rest of the variables are constant
What is a movement in the demand curve?
A line drawn on a graph that shows how much of a product will be bought at different prices
Income effect
- A fall in price increases the purchasing power of customers
- This allows customers to buy more with a given budget
- For normal goods, demand rises with an incresae in incomes
Substitution effect:
- A fall in the price of good X makes it relatively cheaper compared to substitution
- Some customers will switch to good x leading to higher demand
- Much depends on wether products are close substitutes
What is a shift of the demand curve?
The demand curve shifts when the quantity of a product or service demanded at each price level changes
How is the slope of the demand curve?
It has a negative slope (as price increases, quantity decreases)
Definition of complementary goods
Goods that are purchased together because they are consumed together
Definition of substitutive goods
Goods that can be bought as an alternative to other, but perform the same function
Definition of inferior goods
Goods in which demand will fall when incomes rise or rise if income falls
Definition of normal goods
Goods for which demand will rise when income rises or fall if income falls
Definition of luxury goods
Good for which demand increases more than what is proportional as income rises
Factors leading to a change in demand:
- Prices of substitutes
- Price of complements
- Changes in consumer incomes
- Fashion tastes and preferences
- Marketing, advertising and branding
- Demographics
- External shocks
