4.1.2.1 The determinants of the demand for goods and services Flashcards
What is demand in economics?
Demand is the quantity of a good or service that consumers are able and willing to buy at a given price during a specific period of time.
What does a demand curve show?
A demand curve shows the relationship between the price of a good and the quantity demanded, typically illustrating an inverse relationship (as price falls, quantity demanded rises).
What causes movements along the demand curve?
Movements along the demand curve are caused by changes in the price of the good, leading to either an expansion (price falls, quantity demanded rises) or contraction (price rises, quantity demanded falls) of demand.
What causes a shift in the demand curve?
A shift in the demand curve is caused by factors other than price, such as changes in income, population, tastes, or the price of related goods (substitutes or complements).
What is the mnemonic for factors that shift the demand curve?
The mnemonic is PIRATES:
Population
Income
Related goods
Advertising
Tastes and fashions
Expectations
Seasons
How does population affect demand?
A larger population increases demand, and changes in population structure (e.g., age distribution) can also affect demand for specific goods.
How does income affect demand?
Higher disposable income increases demand for goods, as consumers can afford more. Wealth also influences demand, as perceived increases in wealth lead to higher spending.
What are substitutes, and how do they affect demand?
Substitutes are goods that can replace each other (e.g., two brands of TVs). If the price of a substitute falls, demand for the original good decreases as consumers switch to the cheaper option.
What are complements, and how do they affect demand?
Complements are goods used together (e.g., strawberries and cream). If the price of one complement rises, demand for the other falls (e.g., higher strawberry prices reduce demand for cream).
How does advertising affect demand?
Advertising increases consumer loyalty and awareness, leading to higher demand for the advertised good.
How do tastes and fashions affect demand?
Changes in consumer preferences (e.g., shifting from physical books to e-books) can shift the demand curve as tastes evolve.
How do expectations affect demand?
If consumers expect future price increases (e.g., for shares), current demand may rise as they seek to buy before prices go up.
How do seasons affect demand?
Demand for certain goods (e.g., ice cream, sun lotion) varies with seasons, increasing in summer and decreasing in winter.
What is the law of diminishing marginal utility?
The law states that as more units of a good are consumed, the additional satisfaction (marginal utility) derived from each extra unit decreases, so consumers are willing to pay less for additional units.
Why is the demand curve downward sloping?
The demand curve slopes downward because of the inverse relationship between price and quantity demanded, driven by diminishing marginal utility.
How does diminishing marginal utility explain consumer behavior?
Consumers derive less satisfaction from each additional unit consumed, so they are only willing to buy more if the price decreases.
What is an example of diminishing marginal utility?
The first chocolate bar provides high satisfaction, so a consumer is willing to pay more. The second bar provides less satisfaction, so the consumer is willing to pay less. Eventually, utility reaches zero.
What is the difference between an expansion and a contraction of demand?
Expansion of demand: Occurs when price falls, leading to an increase in quantity demanded.
Contraction of demand: Occurs when price rises, leading to a decrease in quantity demanded.
What is the difference between a movement along and a shift of the demand curve?
Movement along the curve: Caused by a change in the price of the good.
Shift of the curve: Caused by factors other than price (e.g., income, tastes, population).
How do social and emotional factors influence consumer spending decisions?
Social factors (e.g., trends, peer influence) and emotional factors (e.g., desire for status, fear of missing out) can affect demand beyond purely economic considerations.
