Demand Flashcards
What is Demand?
Demand is when consumers are willing to buy a particular product at a given price.
What is Effective Demand?
Effective demand is when demand is backed by willingness to buy and ability to buy.
What is Law of Demand?
Law of demand says that when price rises demand goes down and vice versa if all other things remain the same.
What does a demand curve look like?
A demand curve always slopes downwards because demand increases with decrease in price.
Describe movement of demand curve?
Movement along the demand curve is due to price only while the shift takes place due to non-price determinants.
What are the factors that cause shift in demand curve? (non-price determinants)
- Income level of consumers
- Advertising
- Expectations regarding future
- Population
- Prices of complementary goods
- Prices of substitute goods
- Consumers’ preferences
What are complementary goods?
Complementary goods are those which have joint demand.
What is Price Elasticity of Demand? (PED)
It refers to the degree of responsiveness of demand to a change in price.
What does a perfectly elastic PED look like?
It is a a horizontal line… where the value of PED is infinity.
How to calculate PED?
PED = (% change in quantity demanded) / (% change in price)
Name the types of PED.
- Unit elastic : If the value of PED = 1
- Elastic = If the value of PED > 1
- Inelastic = If the value of PED < 1
- Perfectly Elastic = If the value of PED = infinity
- Perfectly inelastic = If the value of PED = 0
Name the determinants of PED.
- Nature of the product
- Type of the product
- Number of substitutes available
- Time period involved
- Price of the product
- Percentage of income spent on the product
What does a perfectly inelastic PED look like?
It is a a vertical line… where the value of PED is 0.
Is alcohol inelastic or elastic?
Inelastic
What is Cross Elasticity of Demand? (XED)
It refers to responsiveness of demand of one product to a change in the price of the other product.
Why is PED always negative?
As its graph always slopes downwards.
What does XED > 1 and XED < 1?
It means that both products are closely related to each other and vice versa, respectively.
How to calculate XED?
XED = (% change in demand for product A) / (% change in price of product B)
Name the two types of XED.
- XED is positive for substitute goods. (it’s graph upward sloping)
- XED is negative for complementary goods. (its graph is downward sloping)
What is Income Elasticity of Demand? (YED)
Income elasticity of demand (YED) refers to the degree of responsiveness of demand to a change in income.
When is YED positive? And why?
In case of superior and normal goods such as mobile phone and laptops etc. income elasticity is positive as their demand increases with the increase in income and vice versa.
When is YED negative? And why?
In case of inferior goods such as bicycle and economical clothing etc. income elasticity of demand is negative as their demand decreases with the increase in income and vice versa.
What are normal goods?
Superior goods, like phone etc, their demand increases with increase in income.
How to calculate YED?
YED = (% change in quantity demanded) / (% change in income)
What are inferior goods?
Inferior goods are often low-cost replacement goods that are seen as poorer quality. Examples include: bicycle, economic clothing etc.
What are some examples of YED = 0?
Toothpaste and salt, as their demand doesn’t change with price.
