Chapter 3 - Demand Flashcards
What is demand?
The quantity of a good or service that consumers are willing and able to buy given its price, the price of other goods, and consumers’ incomes and preferences
What are the factors that influence demand?
- The price of a good
- Consumer income
- The price of other goods
- Consumer preferences
What is market demand?
The total quantity of a good or service that all potential buyers are willing and able to buy at any given price in a given period of time.
What is joint demand?
Demand for goods that are interdependent, such that they are demanded together.
They are made up of complementary goods
What is composite demand?
Demand for good that has multiple uses
What is competitive demand?
Demand for goods that are in competition with each other
They are made up of substitute goods
What does ‘ceteris paribus’ mean?
All other things being equal - it is used when we focus on changes in one variable while holding other influences constant.
What is the law of demand?
A law stating the inverse relationship between quantity demanded and the price of a good or service, ceteris paribus
What is the real income effect?
It is where a consumer has a change in real income when buying something at a certain price
(e.g. At a higher price, a
consumer buying an Xbox game has less income left over. This is referred to
as the real income effect of a price increase.)
What is the substitution effect?
When consumers may find other goods more attractive and choose
to buy something else instead due to a change in price
(e.g. If the price of Xbox
games goes up, consumers may find other goods more attractive and choose
to buy something else instead of Xbox games. This is referred to as the
substitution effect of a price increase.)
What causes a change in the demand curve?
Change in price - Extension/Contraction along demand curve
Change in non-price factors - Shift right/left in demand curve
What is the ‘snob effect’?
It is where some people may value certain goods more highly simply because their price is high, especially if they know that other people will observe them consuming
these goods.
This is also known as conspicuous consumption effect
An example might be Rolex watches. People gain value from having other people notice that they are rich enough to afford to consume a particular good.
What is a normal good?
Quantity demanded for a good increases in response to an increase in consumer incomes.
What is an inferior good?
Quantity demanded for a good decreases in response to an increase in consumer incomes.
What are substitutes?
When consumers regard 2 goods as alternatives, so that the demand for one good is likely to rise if the price of the other good rises.
What are complements?
Two goods consumed jointly, so that an
increase in the price of one good causes demand for the other good to fall
What is consumer surplus?
The value that consumers gain from consuming a good or service over and above the price paid.
What is the relationship between consumer surplus and price?
If the price of a good increases, this will reduce the overall size of consumer surplus, and affect the welfare that society receives from consuming that good.
