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Economics - paper 1 > demand > Flashcards

demand Flashcards

1
Q

what is marginal utility?

A

the change in satisfaction from consuming an extra unit.

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2
Q

what is demand?

A

demand is the quantity of a good/service consumers are willing and able to buy at a given price in a given time period.

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3
Q

what is the difference between movements along the demand curve and shifts of the demand curve?

A

a MOVEMENT along the demand curve is caused by a change in price.
a SHIFT of the demand curve is caused by a change in any of the factors which affect demand

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4
Q

what is the acronym used for the shifts of demand? (conditions of demand)

A

PASIFIC

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5
Q

what does PASIFIC stand for? (shifts of demand)

A 
Population
Advertising
Substitutes
Income
Fashion and taste
Income tax
Complementary goods
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6
Q

apart from PASIFIC, what other conditions of demand are there? (shifts of demand)

A

expectations
seasons
government legislation

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7
Q

what is the concept of diminishing marginal utility?

A

the law of diminishing marginal utility states that the satisfaction derived from the consumption of an additional unit of a good will decrease as more of a good is consumed.

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8
Q

how does the concept of diminishing marginal utility explain why the demand curve is downward sloping?

A

if more of a good is consumed, there is less satisfaction derived from the good. this means consumers are less willing to pay high prices at high quantities since they are gaining less satisfaction.

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9
Q

how does population shift the demand curve?

A

greater population will mean greater demand so a shift to the right. the age of the population impacts consumer spending habits

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10
Q

how does advertising shift the demand curve?

A

affects our willingness to buy, a successful advertising campaign will make people think more favorably about the good, increasing demand so shift to the right.

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11
Q

how does substitute’s price shift the demand curve?

A

substitutes are goods/services in competitive demand. if price of one good increases then demand for the substitute is likely to rise too.

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12
Q

how does income (disposable) shift the demand curve?

A

When income increases, our ability to
purchase goods and services increases, and
this causes an outward shift in the demand
curve.
But when incomes fall there will be a
decrease in demand, except for inferior
goods

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13
Q

what is normal good?

A

an increase in consumer incomes will, ceteris paribus, lead to an increase in the quantity demanded at any given price.
e.g. cars, designer clothing, restaurant dining

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14
Q

what is an inferior good?

A

where quantity demanded decreases in response to an increase in consumer incomes.
e.g. public transport, fast food

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15
Q

how does fashion/taste shift the demand curve?

A

if fashion changes towards a good, we want to buy more of it.

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16
Q

how does income tax shift the demand curve?

A

any change in tax will impact consumers disposable income and therefore effect demand

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17
Q

how do compliments shift the demand curve?

A

two compliments are products in joint demand.
fall in price of compliment will increase demand.
e.g. printers and printer ink, tennis rackets and tennis balls

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18
Q

what is latent demand?

A

latent demand exists when there is willingness to purchase a good, but where the consumer lacks the real purchasing power to be able to afford the product.

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19
Q

what is the main cause of latent demand?

A

persuasive advertising, where the producer is seeking to influence consumer tastes and preferences.

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20
Q

what is derived demand?

A

the demand for a factor of production used to produce another good/service
e.g. if demand for cars increases, demand for steel and oil will increase too, wood (construction 60%), labour (in factor markets)

21
Q

what is composite demand?

A

where goods have more than 1 use- an increase in demand for one product will cause a decrease in supply for the other product.
e.g. milk can be used to make butter, cream, yoghurt..

22
Q

what is effective demand?

A

when desire to buy a product is backed up by an ability to pay for it

23
Q

what does the law of demand state?

A

there is an inverse relationship between price of a good and quantity demanded

24
Q

why is demand curve downward sloping?

A

1) income effect - as prices rise, our incomes can’t stretch as far so we buy less
2) substitution effect - if price of one good falls, it becomes relatively cheaper so people will switch to it from the more expensive one

25
Q

what is price elasticity of demand (PED)?

A

measures the responsiveness of demand after a change in price

26
Q

what is formula for PED?

A

percentage change in Q divided by percentage change in P

27
Q

what does is mean if PED= 0

A

demand is perfectly inelastic

demand does not change at all when price changes, demand curve is vertical

28
Q

what does it mean if PED is between 0 and 1

A

demand is inelastic

% change in demand from a to b is smaller than % change in price

29
Q

what does it mean if PED= 1

A

demand is unit elastic

% change in demand is exactly the same as % change in price

30
Q

what does it mean if PED greater than 1

A

demand elastic

demand responds more than proportionately to a change in price

31
Q

what are the factors affecting PED?

A

number of close substitutes
cost of switching between products
degree of necessity or whether good is a luxury
time period allowed following a price change

32
Q

what is the relationship between inelastic demand and firms total revenue?

A

a rise in price leads to rise in total revenue

33
Q

what is the relationship between elastic demand and firms total revenue?

A

a fall in price leads to a rise in total revenue

34
Q

what is the relationship between perfectly inelastic demand and firms total revenue?

A

a given price change will result in the same revenue change

35
Q

What are social factors affecting demand?

A

Social awareness e.g. of risks of smoking
Social norms, changing norms of behaviour e.g. falling demand for plastic bags in supermarkets
Social pressure, peer pressure affecting drugs

36
Q

What are emotional factors affecting demand?

A

Emotional arousal can affect demand for health insurance after major accident
Binge eating/drinking at times of personal insecurity
Demand for products like football tickets and antiques have strong emotional attachment

37
Q

What factors affect PED?

A

Number of close substitutes - the more, the more elastic as its easier to switch

Cost of switching between products - if cost involved, tends to be in elastic

Degree of necessity or whether it’s a luxury - necessity= inelastic, luxury=elastic

Habitual consumption - less sensitive to price if bough out of habit= inelastic

Peak and off peak demand - inelastic at peak times, elastic at off peak times

38
Q

What is shifting the burden of the tax?

A

With indirect taxes, suppliers may be able to pass on some or all of the tax onto consumer by raising price, depends on elasticity
Inelastic = tax can be passed on to consumer
Elastic = consumers more sensitive to price changes, supplier may choose to absorb the tax

39
Q

Coefficient of PED along linear demand curve

A

For straight line graph, PED varies along the curve.
At higher prices, reduction in price will have elastic response
Demand is inelastic towards the bottom of D curve.

40
Q

What are limitations of PED data?

A

Inaccurate, incomplete data
Consumer prices sensitivity changes overtime
Elasticities vary by region, time
Not all businesses are profit maximisers
Élasticités will vary within product ranges

41
Q

What is income elasticity of demand (YED)?

A

Measures relationship between a change in quantity demanded for good X and a change in real income.

42
Q

What is the formula for YED

A

% change in Demand divided by change in income

43
Q

What is gross income

A

Total income before any deduction such as income tax

44
Q

Normal goods and YED

A

Positive YED so as consumers income rises, more is demanded at each price.

Normal necessities = inelastic, D rising less than proportionately to income

Luxury goods = elastic, D rises more than proportionately to change in income.

45
Q

Inferior goods and YED

A

Has a negative YED, demand falls as income rises.

46
Q

What is cross price elasticity of demand (XED/CPED)?

A

Measures responsiveness of demand for good X following a change in price of related good Y

47
Q

Substitutes and XED

A

Close substitutes
Close rise in price for X = large rise in demand for Y

Weak substitutes
Large rise in price for S = small increase in demand for T

XED for 2 substitutes will be positive.

48
Q

Compliments and XED

A

Close compliments
Small fall in price for A = big rise in demand for B

Weak compliments
Large fall in price for E = small increase in demand for F

Negative value for XED

Economics - paper 1 (8 decks)

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