7- Demand Flashcards
Demand definition
Demand is the quantity of good and services that will be bought at any given price over a period of time.
What is the Law of Demand?
Assuming ceteris paribus, there is an inverse relationship between price and quantity demanded.
Demand curve
Is almost always downward sloping due to the law of demand and it represents the law of diminishing marginal utility.
Price
What the buyer pays for a specific good or service
Quantity
The total number of units purchased at that price.
Contraction of demand
A move up the demand curve. As price increases demand decreases.
Extension of demand
A move down the demand curve. As price falls demand increases.
What are the conditions of demand?
Factors other than price which lead to a change in demand:
- Population
- Advertising
- Substitutes
- Income
- Fashion
- Interest rates
- Complements
What do a change in the conditions of demand cause?
A shift to the supply curve. Right if there is an increase and left if there is a decrease.
The 2 theories that explain the law of demand?
- Income effect: when prices fall, consumer can afford a greater quantity of goods and services (assuming income is fixed). So demand for those goods and services increase.
- Substitution effect- when the price of one good falls, consumer will buy more of the cheaper alternative good or service. So demand for a cheaper good will increase and demand for the costlier good. Positive relationship
What is a Normal Good?
Increase in income, leads to an increase in quantity demanded e.g a new car , designer clothes
What is an Inferior Good?
Increase in income leads to a reduction in quantity demanded e.g public transport, fast food
Consumer Surplus definition
The difference between the price consumers are willing and able to pay compared to what they actually pay.
Where is consumer surplus found?
Above the price line but below the demand curve.
Why does demand change when the price changes?
- Effective demand (willing and able to buy)
- Budget constraint (unable to pay)
- Maximization of utility