Demand Flashcards

1
Q

What is demand?

A

Refers to how much is demanded at each price over a certain period of time.

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2
Q

What is the shape of the demand curve?

A

It is downward sloping from left to right

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3
Q

What is the substitution effect?

A

When there is a rise in price the consumer tends to buy more of a relatively lower priced good compared to higher

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4
Q

What is the income effect?

A

When there is a rise in price consumers will suffer a fall in their real incomes

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5
Q

What causes shifts in the demand curve?

A

Real incomes

Size or age distribution of the population

Tastes fashion or preferences

Prices of substitutes or complements

The amount of advertising

Interest rates

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6
Q

What is total utility?

A

It is the amount of statisfaction a person derives from the total amount of a product consumed

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7
Q

What is marginal utility?

A

It is the change in the total utility from consuming a unit of a product

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8
Q

What is the law of diminishing marginal utility?

A

States that as consumption of a product increased the consumers utility increases but at a decreasing rate

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9
Q

What is PED?

A

Measures the sensitivity of QD to a change in its own price

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10
Q

What is the formula of PED?

A

percentage change in QD / percentage change in price

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11
Q

How to interpret results of PED?

A

PED will always be negative since price and quantity move in opposite directions

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12
Q

When is demand price elastic?

A

When the value of PED is less than -1

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13
Q

When is demand unit elastic?

A

When the value of PED is -1

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14
Q

When is demand perfectly inelastic?

A

When the value of PED is 0

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15
Q

When is demand perfectly price elastic?

A

When the value of PED is infinity

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16
Q

What factors influence PED?

A

Availability of substitutes

Proportion of income spent on product

Nature of the product

Durability of the product

Lenght of time under consideration

Broadness of definition of the product

17
Q

What is total revenue?

A

It is the value of goods sold by a firm and is calculated by multiplying price by quantity sold

17
Q

What is the relationship between TR and PED?

A

when demand is inelastic: TR changes in the same direction of price

when demand is elastic: TR changes in the opposite direction of price

when demand is unit elastic: TR remains unchanged

when demand is perfectly inelastic: TR changes in the same direction and by the same proportion as price

when demand is perfectly elastic: a price rise causes TR to fall to 0

18
Q

What is the significance of PED?

A

For firms:

They can increase their TR by increasing price if they know their good is price inelastic

If firms know that their product is price elastic they can increase their TR by decreasing price

For consumers:

If demand is price inelastic then firms may raise the price of their goods but this would reduce the real incomes of consumers

For the government:

If the government wants to increase their tax revenue then they will place tax on products which are price inelastic

The government could also tax products which are price elastic however in this case the producer would bear most of the tax burden which could make the business unprofitable

19
Q

What is XED?

A

It is the sensitivity of demand for one product to a change in price of another product

20
Q

What is the formula of XED?

A

percentage change in QD of product Y / percentage change in price of product X

21
Q

How do you interpret XED?

A

positive: indicates that the products are substitutes

negative: indicates that the products are complements

22
Q

What is YED?

A

It is the sensitivity of demand for a product to a change in real income

23
Q

How do you interpret YED?

A

positive: indicates that the product is a normal good

negative: indicates that the product is an inferior good

24
Q

What is income elastic demand?

A

When YED is greater than 1

25
Q

What is income inelastic demand?

A

When YED is between 1 and 0

26
Q

What is the significance of YED?

A

To firms:

If firms know that demand for their product is income elastic then they know that demand and TR will increase during periods of economic growth but fall significantly during recessions

It is also important for firms for making investment decisions

To governments:

If the government wishes to maximise tax revenue during a boom then it will place indirect taxes on products which are price inelastic

YED could also help governments in estimating tax revenues from indirect taxes on particular goods and services