Demand Flashcards
What is demand?
Willingness and ability to pay for something at a given time at a given price
What is a market?
A market is a physical or virtual interaction where buyers and sellers meet to exchange goods (tangible), services (intangible), or resources (inputs).
How or where do prices come from?
Competition (Sellers) - Increase demand, low prices
Buyers - higher prices, low demand
What is the law of demand?
Inverse relationship
As the price of a good, service, or resource rises, the quantity demanded will decrease and vice versa, all else held constant
Demand schedule
Table representation of relationship between the price of a good and quantities consumers are willing to buy over a fixed time period (all else held constant)
Demand curve
Graphical representation of the demand schedule
Quantity Demanded (a point on the line)
Quantity of a good that consumers are willing to buy at a given price
Looking at a graph why does the demand curve slope down?
Low prices + high quantity demanded = curve sloping down
What are the reasons why it is a downward-sloping curve?
1) Income effect
2) Substitution effect
3) Diminishing Marginal Utility
What is income effect?
How does it relate to the demand curve?
Effect that a change in price of a good has on the purchasing power of income
High prices, reduces purchasing power
Low prices, increases purchasing power
What is substitution effect?
How does it relate to the demand curve?
(Opportunity cost)
Effect that a change in the price of one item has on the demand for another
High prices for one item, higher demand for the other item (ex: Coke and Pepsi, one soda is too high of a price, expectation that consumers will substitute for the other brand and buy more of it).
What is diminishing marginal utility?
How does it relate to the demand curve?
(MB & MC)
Negative relationship between the quantity of a good and the marginal utility obtained from each additional unit consumed in a given period of time
Ex: Person A really likes ice cream. They eat one cone (super happy), another cone (okay), a third cone (well-being has fallen and it was not worth it to buy after the 2nd cone).
What is market demand?
Everyone or a majority
Overall (sum) or total demand for a good. Represents the horizontal summation of the quantities demanded by individuals, firms, state, global at each price over a fixed time period (all else held constant)
How can the law of demand change?
When everything else is not held constant, nonprice determinants can change the levels of demand
Shift in Demand
Moving the whole line - ex: increase in demand
Change in the quantity of a good demanded at every price.
Increase in demand = rightward shift of the curve (increase quantity demanded)
Decrease in demand = leftward shift of the curve (decrease quantity demanded)
