Demand Flashcards
What assumption is the classical / free market economics based on?
The assumption that economic agents such as consumers, firms, and governments behave rationally.
When is a consumer considered to be behaving rationally?
When they maximise their happiness/ satisfaction (utility).
When is a firm considered to be behaving rationally?
Firms behave rationally when they seek to maximise profit.
What is the theory of rational economic decision making?
The theory of rational decision making assumes that economic agents (individuals, firms and governments) have full information regarding the choices they make and can fully weigh up the cost and benefit of their decision in order to maximise their utility.
What is marginal utility?
The additional satisfaction a consumer gains from consuming on one additional unit. Each unit consumed will add some marginal utility therefore total utility will increase the more it is consumed. However, the marginal utility is likely to decrease as consumption increases as people are likely to get sick of the product.
What is diminishing marginal utility?
Occurs when the additional unit consumed adds less to total utility than the previous unit consumed.
What is demand?
Demand is the quantity of a good or service that consumers are willing and able to purchase at a given price in a given time period.
What is the theory of demand?
The theory of demand states that there is an inverse relationship between price and the quantity demanded of a good/ service. At higher prices a lower quantity will be demanded and at lower prices, a higher quantity will be demanded. This theory assumes ceteris paribus.
What does ceteris paribus mean?
All other things being equal.
Why is the demand curve sloping downwards?
1) The real income effect: As prices rise people will feel poorer as they will not be able to buy as much of a product with their income. The purchasing power of their goods has fallen and therefore they can afford fewer goods.
2) Substitution effect: The good will be more expensive relative to other goods, so people will switch to alternatives.
What happens to the demand curve when there’s a change in demand due to any factor other than price?
1) The curve will shift to the right if there is an increase in demand.
2) The curve will shift to the left if there is a decrease in demand.
What are the non-pricing factors that can cause a change in demand?
1) Income: As income rises the demand for goods will increase as people can now afford to buy more of all goods and services.
2) Tastes: Tastes are affected by advertising, fashion and changes in technology.
3) Price of substitutes (competitive demand).
4) Price of compliments (joint demand): This is when the prices of a product that is used with a complimentary product influences the price of each other e.g. if the prices of a printer goes down people may be more willing to buy more expensive paper.
5) Derived demand: This is when demand for a good results in demand for other goods e.g. if demand for cola increases then more demand for components used to make cola will increase like sugar, plastic bottles.
6) Speculation and expectations for future price changes: If it is expected that a good or commodity will rise in price in the future then ceteris paribus, people may buy more now.
7) An increase in the population leads to an increase in the number of buyers of all goods in the market.
What happens to the demand curve when prices change demand?
The curve does not shift instead there is a movement along the curve. If price increases the movement will move up if price decreases the movement will move down.
