chapter 6: Demand Flashcards
define demand
Demand refers to the quantity of good or services demanded by consumer at various price levels at a point in time
What is the law of demand?
The law of demand state that the quantity demanded of a good varies inversely with its price
ie as as price rises quantity demanded decreases and as price falls quant demanded increases
(from consumers pov)
define inferior goods, giffen goods and veblen goods (all defy law of demand)
inferior goods - falls in price cause consumers to consider goods inferior and switch to higher quality substitutes
giffen goods - staple good in a poor community and few substitutions so when price increases demand increases and vice versa cos they can’t buy anything else
veblen goods - price increases lead to an increase in quantity demanded and vice versa due to conspicuous consumption ie the less ppl that have it the more desirable
Price expectations - rise in price of a commodity may lead to consumers anticipating further price rises and purchasing more in the present, while expectation of lower prices might see purchases postponed
basic essentials
identify factors affecting market demand
The price of the G&S itself
the price of subs or complementary
expected future prices
changes in consumer taste
level of income
size of population - eg increase in ageing population increase need for nursing homes
What si the ceteris paribus assumption?
ceteris paribus is when all other factors remain constant
When we look at certain product we need to keep in mind that price or demand changes due to a lot of different aspects therefore when we look at demand for the product in conjunction to level of income, we assume all other factors are constant
eg the price of mince beef is increased due to demand but it could be due to increase in rent for the grazing fields or increase in transport but then we cant assume t was demand alone that changed the price therefore we use ceteris paribus
Movements along the demand curve - which way is contractionary and which way is expansionary?
demand curve slopes down from left to right and contractionary and expansionary is when u move along the curve NOT shift the curve
(only when there is a change in price ONLYYYY)
contractionary is up and expansionary is down
contractionary is more expensive and less ppl buying whereas expansionary is when less expensive and more ppl buying
shifts in demand curve
to the right is decrease in demand and to the left is increase in demand
ie increase in demand is when consumers are willing to buy more at a higher price whereas decrease in demand is when consumers want lower prices and not demanding as much
(other than price!! ie due to increasing population, rising incomes, changing tastes, etc)
define price elasticity of demand
the price elasticity of demand measures the responsiveness or sensitivity of the quant demanded of a particular product to change in its price
describe elastic, inelastic and unit elastic
elastic - when ppl very responsive to change in price ie when ppl wont buy KitKat if it increased a cent
inelastic - when ppl unresponsive to change in price or when ppl will buy KitKat if its a million dollars
unit elastic - when change in price and proportional to response ie when KitKat is increased by a cent one person wont buy
The importance of price elasticity of demand
Firms - need to understand price elasticity for their products in order to determine their optimal pricing strategy:
If demand is relatively elastic, a firm should lower its prices as this would greatly expand the quantity demanded, thus increasing total revenue
If the price is relatively inelastic, a firm should increase its prices as the fall in quantity demanded would be less than the price increase, raising total revenue
(conduct research abt consumer preference to determine price elasticity of their product)
the gov needs to be able to predict the effects of changes in the level of any indirect taxes,
such as sales taxes, excise duties and special levies that it imposes on goods such as alcohol,
tobacco products and petrol cos bcos these are inelastic goods ppl will pay any price including tax hence gov gets more revenue
if gov increase tax on elastic good sales would drop
Measuring the elasticity of demand: total outlay method
Total revenue (total outlay)
when price increase and total outlay decrease it would be elastic bcos it was responsive to price change
When price decreases and total outlay increases it would be inelastic bcos it was unresponsive to price change
When price increases and total outlay stays the same then it would be unit elastic bcos it stayed the same (demand fell when price increase) eg when price was $7 people bought 40 and when price increased to $8 people bought 35 and both of their total outlays equal $280
price elasticity and slope of the demand curve
in the upper part of the curve (where prices are high, demand will be relatively elastic) quantity demanded is highly responsive to price changes, whereas at low price levels, demand will be relatively inelastic
describe the two extremes of elasticity of demand and unit constant
there are two extremes: perfectly elastic demand and perfectly inelastic demand
perfectly elastic - horizontal line ie accept only one price and nothing above that price but if it increases no one will buy it
perfectly inelastic - vertical line ie willing to pay any pricefor given amt
Constant unit elastic - quant demanded responds proportionately to price - eg electricity
What are the factors affecting elasticity of demand
whether the good is a luxury or a necessity ie luxury elastic, necessity inelastic
whether the good has close substitutes eg margarine and butter have highly elastic demand cos if price of butter increases u can just get margarine
the expenditure on the product as a proportion of income eg ppl would not react to price increase in pens if there was a price increase in cars
the length oftie subsequent to a price change ie consumers take time to adjust to price change
whether a good is habit-forming(addictive) or not eg cigarettes
