7- Demand Flashcards

1
Q

Demand definition

A

Demand is the quantity of good and services that will be bought at any given price over a period of time.

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2
Q

What is the Law of Demand?

A

Assuming ceteris paribus, there is an inverse relationship between price and quantity demanded.

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3
Q

Demand curve

A

Is almost always downward sloping due to the law of demand and it represents the law of diminishing marginal utility.

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4
Q

Price

A

What the buyer pays for a specific good or service

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5
Q

Quantity

A

The total number of units purchased at that price.

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6
Q

Contraction of demand

A

A move up the demand curve. As price increases demand decreases.

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7
Q

Extension of demand

A

A move down the demand curve. As price falls demand increases.

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8
Q

What are the conditions of demand?

A

Factors other than price which lead to a change in demand:

  • Population
  • Advertising
  • Substitutes
  • Income
  • Fashion
  • Interest rates
  • Complements
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9
Q

What do a change in the conditions of demand cause?

A

A shift to the supply curve. Right if there is an increase and left if there is a decrease.

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10
Q

The 2 theories that explain the law of demand?

A
  • 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
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11
Q

What is a Normal Good?

A

Increase in income, leads to an increase in quantity demanded e.g a new car , designer clothes

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12
Q

What is an Inferior Good?

A

Increase in income leads to a reduction in quantity demanded e.g public transport, fast food

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13
Q

Consumer Surplus definition

A

The difference between the price consumers are willing and able to pay compared to what they actually pay.

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14
Q

Where is consumer surplus found?

A

Above the price line but below the demand curve.

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15
Q

Why does demand change when the price changes?

A
  • Effective demand (willing and able to buy)
  • Budget constraint (unable to pay)
  • Maximization of utility
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16
Q

Quantity demanded equation

A

Quantity demanded= function(price, income, price of other goods/services, consumer tastes, all other factors)

The quantity demanded is said to be a function of (depends upon) all the above factors.

17
Q

What is a Veblen Good?

A

A special type of good identified by Veblen. He identified the ‘snob’ effect where people paid more for certain products as their price increased. Veblen believed it was due to the increased status that buying higher priced goods come with.