Demand Flashcards
What is a market?
Anywhere where buyers and sellers can exchange goods or services
What is demand?
Demand is the quantity of goods and services that consumers are willing and able to buy at a given price and at a particular time
What is the law of demand?
As the price increases, the QD decreases
What is a a movement along the demand curve?
A contraction or extension in demand, caused only by a change in price
What are the reasons that the demand curve slopes downwards?
Income effect - As the price of a product decreases, the real income (income adjusted for inflation) of consumers increases, therefore they have increased purchasing power and can purchase more of the goods/service.
Substitution effect - As the price of a substitute good decreases, it becomes more desirable and attractive compared to similar goods.
law of diminishing marginal utility - As consumption increases, the marginal utility (satisfaction derived from consuming one additional good) decreases, therefore a consumer is willing to pay less for each additional good
Therefore resulting in a downward sloping demand curve
What is a shift in demand?
An increase or decrease in the quantity demanded of a good or service at every price and is caused by factors other than price
Examples of causes in a shift?
- Equal distribution of wealth can shift the demand curve for luxury products left
- Changes in real incomes (incomes adjusted for inflation)
- Changes in the price of substitutes
- Introduction of new products into a market can affect demand for substitutes
- Changes in derived demand
- Changes in the price of complementary goods in joint demand
What is XED + It’s formula?
Cross Elasticity of Demand (XED) is a measure of how responsive QD is for one good to a change in price of another good
XED = % change in QD of good A / % change in P of good B
What is YED + It’s formula?
Income Elasticity of Demand (YED) is a measure of how responsive the QD of a good is to a change in real Incomes.
YED = % Change in QD / % Change in real Incomes
What is PED + It’s formula?
Price Elasticity of demand (PED) is a measure of how responsive QD of a good is to a change in it’s price.
PED = % Change in QD / % Change in P
What is Inelastic demand + It’s diagram?
Steep demand curve
Inelastic demand is when the % change in price is greater than the % change in QD of a good and It’s value is between 0 and 1. I.e. It’s not very responsive to a change in the price of a good.
What is Elastic demand + It’s diagram?
Shallow demand curve
Elastic demand is when the % change in QD is greater than the % change in price of a good and has a value of above 1 when ignoring the minus symbol. I.e. It’s very responsive to a change in the price of a good.
What is Unit elasticity of demand?
The % change in QD of a good is equal to the % change in price. For example, a 20% decrease in price leads to a 20% increase in QD.
What are the factors affecting PED?
- Availability of substitutes
- Type of good, e.g. Luxury or necessity
- % of Income spent on a good
- Time
