Demand Flashcards
What is demand?
Desire for commodities by people, firms, or governments
Demand creates a market for goods and services.
What does the Law of Demand state?
A rise in price of a commodity will cause a consumer to purchase less of that commodity
This assumes other factors, like prices and income, remain constant.
What is the demand curve?
The whole curve showing every price and quantity demanded
Specific points on the curve represent specific prices and quantities.
What causes shifts in demand curves?
Factors include:
* Income increase
* Taste and preferences
* Prices of related goods
* Expectations
* Population growth
A rightward shift indicates an increase in demand.
What is Price Elasticity of Demand?
How responsive people are to price changes
It measures the sensitivity of demand when prices change.
Define Elastic Demand.
Large change in demand relative to price change
This occurs when consumers are highly responsive to price changes.
Define Inelastic Demand.
Small change in demand relative to price change
Consumers are less responsive to price changes.
Why are elasticities always negative?
Because changes in price and quantity go in opposite directions
Price increase leads to quantity decrease and vice versa.
What is the formula for elasticity?
E = % change in quantity / % change in price
This formula helps quantify the responsiveness of demand.
What characterizes price elastic goods?
Non-essential and have lots of substitutes
Consumers can easily switch to alternatives if prices rise.
What characterizes inelastic goods?
Necessary, addictive, and have no substitutes
Examples include bread and water.
What is Consumer Surplus?
The difference between the maximum price a consumer is willing to pay and the actual price paid
Economists use this to measure the gains from trade.
Shape of the demand curve and what that means
Slopes downwards. As price decreases the quantity the person demands increases.
