Demand Flashcards
What is demand?
Refers to how much is demanded at each price over a certain period of time.
What is the shape of the demand curve?
It is downward sloping from left to right
What is the substitution effect?
When there is a rise in price the consumer tends to buy more of a relatively lower priced good compared to higher
What is the income effect?
When there is a rise in price consumers will suffer a fall in their real incomes
What causes shifts in the demand curve?
Real incomes
Size or age distribution of the population
Tastes fashion or preferences
Prices of substitutes or complements
The amount of advertising
Interest rates
What is total utility?
It is the amount of statisfaction a person derives from the total amount of a product consumed
What is marginal utility?
It is the change in the total utility from consuming a unit of a product
What is the law of diminishing marginal utility?
States that as consumption of a product increased the consumers utility increases but at a decreasing rate
What is PED?
Measures the sensitivity of QD to a change in its own price
What is the formula of PED?
percentage change in QD / percentage change in price
How to interpret results of PED?
PED will always be negative since price and quantity move in opposite directions
When is demand price elastic?
When the value of PED is less than -1
When is demand unit elastic?
When the value of PED is -1
When is demand perfectly inelastic?
When the value of PED is 0
When is demand perfectly price elastic?
When the value of PED is infinity