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microeconomics theme 1 (y12) > demand > Flashcards

demand Flashcards

1
Q

demand

A

both willing and able to buy

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2
Q

contraction in demand

A

when prices increase there is a contraction in demand, moving down along demand curve

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3
Q

extension in demand

A

when prices decrease, there is an extension in demand, moving up along demand curve

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4
Q

what is the inverse relationship

A

price and quantity have an inverse relationship between price of good and quantity demanded of it

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5
Q

When price decreases, economists predict that quantity demanded will increase. But this assumes:

A

ceteris paribus, otherwise factors other than price might cause quantity demanded to decrease (not increase)

Assuming ceteris paribus, the demand curve will slope downwards because a decrease in price will increase quantity demanded, as more goods are demanded by consumers.

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6
Q

price elasticity of demand

A

measures how much quantity demanded will respond to a change in price

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7
Q

formula for ped

A

percentage change in quantity demanded/ percentage change in price

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8
Q

value of peds?

A

due to law of demand ped is always negative, increase in one factor means decrease in other due to inverse relationship
+/- or -/+ always gives -

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9
Q

ped values

A

greater than 1, price is elastic: for any given price chance, there is a greater proportion of change in quantity demanded

value less than 1, between -1 and 0 price inelastic; when price changes, QD changes but less than change in price

0= perfectly price inelastic, regardless of price change, quantity demanded wont change at all

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10
Q

inelastic ped

A

percentage change in QD is smaller than percentage change in price
- relatively minimal response to change in price

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11
Q

how is price and quantity demanded of a good related if ped is -1

A

percentage change in price, leads to percentage change in quantity demanded of same size

qd same as p

it is unitary elastic

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12
Q

explaining elasticites

A

inelastic between 0 and -1= if closer to 0, the more inelastic, responding less, steeper, smaller change in qd

elastic -1 and + ,, the closer to negative infinity, more elastic, more response to change in price

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13
Q

Perfectly inelastic demand

A

When PED = 0. Demand will not respond at all to a change in price.

E.g. life-saving medicine

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14
Q

Inelastic demand curve

A

Steeper slope because a large change along the price axis leads to a smaller % change along the quantity axis.

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15
Q

Elastic demand curve

A

Gentle, flatter slope because a small change along the price axis leads to a larger % change along the quantity axis.

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16
Q

Perfectly elastic demand

A

When PED = -∞. Demand will be infinitely responsive to a change in price.

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17
Q

factors influecning ped

A

necessity
addiction and habit
substitues
brand loyalty
proportion of income
time period

NASBIT

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18
Q

factors influencing: is it a necessity or luxury

A

necessity is something we need, luxury is not needed but nice if it can be afforded

for necessities: we are likely to be less responsive to changes in price, as regardless of price it is a needed source, so demand will be inelastic

luxury: cannot always be afforded but if consumer can afford then it is nice to have - thus more responsive to changes in price, demand is elastic

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19
Q

factors influencing - addiction and habit

A

e,g cigarettes more inelastic , if price changes, consumers forced by their addiction to continue demanding similar quantity of cigarettes , demand not responsive to changes in price

habits- when hooked, they cannot break away from their habitual behaviour and will continue to consume

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20
Q

factors influencing : availability of subsitutes

A

substitute is a product that can be replaced by another product

example crisps-
more likely to be elastic as they have substitues
consumers can switch to other types and flavours, or brands- if the price of one product was to increase, they could easily switch to other types. so demand would be responsive to changes in price suggesting elastic demand

inelastic- e.g. iphone chargers, very few substitutes for them, consumers have very few options as they must use iphone charger for their phone, so if price were to change they would have to continue demanding it, demand would not be responsive to change in price- suggesting inelastic

many substitues- elastic
less substitues- inelastic

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21
Q

factors influencing- brand loyalty

A

example ferrari vs nissan

ferrari- inelastic because of its strong brand loyalty, continue to demand it despite price change as they dont look to purchase based on price, they look to purchase based on brand/design/engineering - thus less likely to be responsive to changes in price

nissan- weak brand loyalty, buy due to its cheap and affordable price. more concerned about the car’s price, if price were to change, consumers would be very responsive- suggestive elastic demand

strong brand loyalty inelastic
weak brand loyalty elastic

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22
Q

factors influencing- proportion of income

A

example-
larger proportion of income= elastic
laptops- elastic, accounts for a larger proportion of consumer income , has more of a significant impact on consumers, more responsive to changes in price- elastic

smaller proportion of income= inelastic
biro pens - more inelastic , taking up smaller proportion of consumer income, change in price only equates for a smaller amount due to its lower price, thus less responsive to change in price- inelastic

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23
Q

factors influencing ped- time

A

short run- inelastic, no time to search for substitutes: still demanding same amount as there is a lack of time to find other substitutes/ solutions

long run- enough time to search for other substitues: more elastic- more time to find other substitutes and solutions. to switch over too- less urgency

thus price elasticity is more elastic in long run

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24
Q

what is profit

A

total revenue - total cost

25
Q

total revenue calculation

A

price x quantity

26
Q

revenue with elastic demand

A

if price increases then quantity demanded decreases so bigger % change in overall revenue (revenue decreases)

if price decreases, quantity demanded increases so bigger % change in overall revenue (revenue increases)

27
Q

revenue with inelastic demand

A

if price increase, demand decreases only by a small amount (but overall total revenue does increase)

if price decreases, demand increases only by a small amount but overall revenue decreases)

28
Q

Unitary elastic demand and total revenue

A

Whether price increases or decreases, total revenue will not change at all

quanitty demanded decreases by the same percentage, so total revenue will not change

29
Q

conditions of demand- advertising, fashion and trends

A

there is more appeal to the products/ services, consumers more inclined to spend and purchase, more demand from consumers than before - increase in demand so outward shift in demand curve

if it has less appeal, no longer popular etc, inward shift of demand curve, fewer people willing to buy

30
Q

conditions of demand- population and age structure

A

if size of population shrinks- there will be less demand for goods
so inward shift in demand curve

higher population, more people are demanding so outward shift on demand curve

age structure: population structure
e.g. more elderly people so demand for wheelchairs will increase
so outward shift in demand curve

or teenagers decreasing as people have less children, e.g. so demand for video games decrease - inward shift in demand curve

31
Q

conditions of demand- seasons

A

skis during winter, increased demand, shifts the demand curve outwards.

after winter, demand curve will shift inwards

seasons change. demand for particular goods change too

32
Q

normal goods?- shifts in demand

A

increase in income,, the demand for high quality goods increase so demand curve shifts outwards

decrease in income,, consumers demand less

demand increases when income rises
demand decreases when incomes decrease

any goods consumers would buy more of if they had a higher income

33
Q

inferior goods? shifts in demand

A

(for basic goods, if other goods have a decrease in price you are most likely to spend on a cheaper substite due to lower income

if u have a higher income, you are more likely to spend on better high quality goods so the demand for the other basic good will decrease)

demand decreases when incomes rise
demands increase when incomes decrease

e.g. own brand food.

34
Q

change in prices of goods vs change in price of other goods

A

moving along the demand curve if its a change in price of our good

shift in demand curve if its a change in price of other goods

35
Q

shifts in demand- complements and subsitutes

A

substitute goods-
if a subsitiue is being sold for a cheaper price, the initial good will witness a decrease in demand shifting its curve inwards

complementary goods , goods which are bought and used togehter
e.g. iphone apps in iphone being more expensive, demand for iphones decrease as u cant use it without it- decrease in demand, inward shift

36
Q

factors affecting demand/ conditions of demand

A

seasons
income
trends
adveritisng
population size and structure
price of other goods

37
Q

Changes in income (effects on demand)

A

For normal goods (e.g. Ben & Jerry’s ice cream) demand will increase when incomes rise, and demand will decrease when incomes fall.

For inferior goods (e.g. Sainsbury’s Basics ice cream) demand will increase when incomes fall, and demand will decrease when incomes rise.

38
Q

. Price of other goods (affects on demand)

A

For substitute goods (e.g. iPhones and Samsungs) demand for the first good (iPhone) will decrease when price of second good (Samsung) falls, and demand for the first good (iPhone) will increase when price of second good (Samsung) rises.

For complementary goods (e.g. iPhones and iPhone apps) demand for the first good (iPhone) will increase when price of second good (iPhone apps) falls, and demand for the first good (iPhone) will decrease when price of second good (iPhone apps) rises.

39
Q

income elasticity of demand - 2008 recession,

A

consumers had to cut spending because incomes fell, companies like jaguar and british airways nearly died out

40
Q

income elasticity of demand formula

YED

A

percentage change of quantity demanded/ change in income

41
Q

what is yed

A

how much the response in quantity demanded will change in response a change in income

42
Q

what happens if income falls for inferior goods

A

percentage change in income will be negative, demand for inferior goods will rise
switching from expensive goods to cheaper inferior products
demanding more inferior goods- % change in quantity demanded is positive
+/- gives negative YED

43
Q

incomes rising for inferior goods?

A

increase in income, decrease in demand for inferior goods as higher quality goods can be afforded with higher incomes
+/- gives negative overall

44
Q

normal goods , incomes rising?

A

positive change in income as it goes up, quantity demanded of normal goods will increase
+/+ gives a positive yed

45
Q

normal goods, incomes decreasing

A

negative change in income, qd demanded for normal goods decrease, people may switch back to inferior goods
-/- gives positive yed

46
Q

for income inelastic goods

A

income inelastic goods have a yed between 0 and 1

when income increases, quantity demanded will increase by a smaller % (still normal goods with a positive YED)

income inelastic goods are necessities, they are already being consumed so when incomes rise we will only buy a smaller percentage more

47
Q

for income elastic goods

A

yed between 1 and infinity
if incomes rise, the quantity demanded of that good rises by a much higher percentage

income elastic goods are usually luxuries

48
Q

Normal goods

A

For normal goods (e.g. Ben & Jerry’s ice cream), demand increases when income increases, which means the YED for normal goods is positive.

49
Q

Inferior goods

A

For inferior goods (e.g. Sainsbury’s basics ice cream), demand increases when income decreases, which means the YED for inferior goods is negative

50
Q

Income elastic goods (or luxury goods)

A

When YED is between 1 and ∞. Income elastic goods are very responsive to changes in income and are likely to be luxury goods e.g. a rolex

51
Q

Income inelastic goods (or necessity goods)

A

When YED is between 0 and 1. Income inelastic goods are unresponsive to changes in income, and are likely to be necessity goods e.g. bread

52
Q

case study for cross elasticity of demand

A

virgin airlines selling up market expensive tickets
1995- easy jet introduced, sold tickets at lower prices. virgin airlines thus losing customers

53
Q

formula for xed - cross elasticity of demand

A

quantity demanded of good A/ price of good B

how quantity demanded of good a responds to a price change in good b

54
Q

xed values- completementary, substitues and unrealted

A

complementary have negative xed, decrease in completementary price of b will increase quantity demanded of a (e.g.iphone apps and iphones )- more incentivsed to purchase due to cheaper complementary goods
+/- gives - xed
(and vice versa)

substitues have positive xed
price of good b goes + (up), quantity demanded of good a will also increase, consumers will switch over to good A
+/+ gives positive xed
(and vice versa)
decrease in price of good b means decrease in quanitty demanded of a so -/- is +

xed=0, unrelated goods

55
Q

Cross elasticity of demand (XED)

A

XED measures how much quantity demanded of good A changes in response to a change in price of good B

XED formula = % change in quantity demanded (Qd) of A / the % in price (P) of B

56
Q

Complements (or complementary goods)

A

Complements are goods which are used and bought together (e.g. iPhones and iPhone apps)

For complements, if the price of good B (iPhone apps) increases then demand for good A (iPhones) decreases.

XED will be negative.

57
Q

Substitutes (or substitute goods)

A

Substitutes are goods which can replace one another (e.g. iPhones and Samsungs)

For substitutes, if the price of good B (Samsungs) increases then demand for good A (iPhones) increases.

XED will be positive.

58
Q

Unrelated goods

A

Unrelated goods are goods which have nothing to do with each other (e.g. cacti and hover boards)

XED = 0 for unrelated goods

59
Q
A

microeconomics theme 1 (y12) (14 decks)

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