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Microeconomics 1.2 - How Markets Work > Demand > Flashcards

Demand Flashcards

1
Q

Definition of demand

A

The quantity that purchasers are wiling and able to buy at a given price in each time period.

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2
Q

When does demand become effective ?

A

If demand is backed up by willingness and ability to pay the market price.

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3
Q

What is the law of demand ?

A
  • Demand varies inversely with price - lower prices make products more affordable for consumers on limited budgets
  • Higher prices reduce demand.
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4
Q

How does market price effect demand ?

A
  • A fall in market price = extension in demand
  • A rise in market price + contraction in demand.
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5
Q

What factors explain the downward sloping demand curve ?

A
  • Substitution effect
  • Income effect
  • Diminishing marginal utility.
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6
Q

How does the substitution effect explain the downward sloping demand curve ?

A

As the price of a product decreases, it becomes more attractive compared to other similar products. Consumers are more likely to switch to the cheaper option, leading to an increase in the quantity demanded.

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7
Q

How does the income effect explain the downward sloping demand curve ?

A

When the price of a product falls, consumers effectively have more real purchasing power. This allows them to buy more of the product, leading to an increase in the quantity demanded.

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8
Q

How does diminishing marginal utility explain the downward sloping demand curve ?

A

As people consume more of a particular product, the additional satisfaction or utility from each additional unit begins to diminish. This means they are willing to pay less for each successive unit.

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9
Q

Definition of normal good

A

A good that experiences an increase in demand due to an increase in a consumer’s income.

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10
Q

Definition of effective demand

A

Demand for a good or service from consumers that is backed up with an ability to pay and not how much buyers would like to buy if they had unlimited resources.

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11
Q

Definition of derived demand

A

The demand for a factor of production that is used to produce another good or service.

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12
Q

Examples of derived demand

A
  • Steel: demand for steel linked to market demand for cars and construction of new buildings
  • Wood: from furniture and fencing
  • Transport: fall in demand for commuting led to steep decline in demand for public transport
  • Minerals: cobalt and lithium demand has surged as production of electric vehicles have grown.
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13
Q

Definition of joint demand

A

When the demand for one good is directly and positively related to market demand for a related good or service.

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14
Q

Two complements ?

A
  • Said to be in joint demand and the cross-price elasticity of demand is negative
  • the demand for two goods are interdependent.
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15
Q

Examples of joint demand

A
  • Smartphone and apps
  • Pasta and sauces
  • Solar panels and batteries.
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16
Q

Definition of composite demand

A

Where goods have more than one use.

17
Q

What does composite demand explain about the market ?

A

An increase in market demand for one product can lead to a fall in market supply of the other as resources are switched.

18
Q

Examples of composite demand

A
  • Milk: can be used for cheese, yoghurt, cream, butter
  • Land: farmland, urban land (commercial and residential property building)
  • Corn: food for human consumption, a freed grain for livestock, a raw material making ethanol and corn syrup.
19
Q

Definition of marginal utility

A

the change in total utility from consuming one more good.

20
Q

Definition of diminishing marginal utility

A

A person receiving less satisfaction and benefit as they consume more of one good.

21
Q

Factors that impact demand

A
  • Income
  • Tastes and fashion
  • Advertising
  • Population
  • Price of complements.
22
Q

How does income affect demand ?

A

If income increases, more basket of goods become affordable which increases demand.

23
Q

How does tastes and fashion affect demand ?

A

If a brand becomes more fashionable, demand will increase.

24
Q

How advertising affect demand ?

A

If the advertising campaign is successful, consumers will be more willing to purchase more the good.

25
Q

How does population affect demand ?

A

If the population structure of a country were to change, so would the demand for certain goods (e.g. with an ageing population, the UK economy will be demanding more products to suit that age group).

26
Q

How does the price of complements affect demand ?

A

If the price of a good falls, the demand for the complement will increase.

Microeconomics 1.2 - How Markets Work (4 decks)

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