Demand Flashcards
How is MC equal to price?
From a producers point of view the price is how much is costs to produce. From a consumers, it is how much it costs to buy. In both circumstances the price is the marginal cost.
MB ≥ MC, therefore…
MB ≥ P (relative price)
When MB > P …
you will buy
When MB = P …
you will buy (but less)
When MB < P …
you will not buy
What is the total amount bought equal to?
Quantity demanded
What is quantity demanded?
The total amount that people are willing to buy at a certain price
If P decreases, what happens?
MB»P (you will buy more)
MB>P (you will buy more)
MB = P (you will buy more)
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So when price decreases…
The quantity demand increases
Why does the Qd increase when price decrease?
- People who could not afford it can now enter the market
2. Existing customers will buy more
If P increases, what happens?
MB = P (you will buy less)
MB < P (you will buy none)
So when price increases…
Quantity demand decreases
Why does the Qd decrease when price increases?
- Existing customers buy less
2. Some customers were forced out of the market
So what is the relationship between price and quantity demanded?
There is a negative relationship between price and quantity demanded, CETERIS PERIBUS.
What is the relationship between price and quantity demanded called?
The law of demand.
What does the graph representing demand look like?
Downward sloping line because negative relationship
What is the demand curve?
A curve or a line that represents the law of demand.
Explain the law of demand:
Why is it downward sloping?
Why is it the way it is?
Because of the substitute effect and the income effect
What is the substitute effect?
When prices change, opportunity cost changes and people look for substitutes.
What is the income effect?
Purchasing power will increase or decrease meaning people feel poorer or richer.
What factors effect demand?
Price of the good itself Expected future price Price of related goods Income Population Interest rate
What is the relationship between the price of the good itself and demand?
Negative relationship
law of demand
What is the relationship between the expected future price and demand?
If the expected future price rises, the demand today will go up. Therefore it is a positive relationship.
What is the relationship between population and demand?
When population increases as does demand. Therefore it is a positive relationship.
What is the relationship between interest rate and demand?
When interest rate increases, people save more and consume less so demand decreases. Therefore there is a negative relationship.
What is the relationship between price of related goods and demand?
Related goods can be substitutes and compliment goods (in consumption).
What is the relationship between price of substitutes, in consumption, and demand?
If they are substitutes (tea and coffee) then when the price of coffee increases, Qd coffee decreases (law of demand) and thus the demand of tea increases. So there is a positive relationship.
What is the relationship between price of compliment goods, in consumption, and demand?
If they are compliment goods (cars and gas) then when the price of one increases, the Qd of that good decreases (the law of demand) and thus the demand of the compliment good decreases. So the relationship is negative.
What is the relationship between income and demand?
It depends whether it is a normal good or an inferior good.
What is a normal good?
A good you buy more of when your income increases, less of when your income decreases.
What is an inferior good?
A good you buy less of when your income increases, more of when your income decreases.
What is the relationship between income and demand with a normal good?
When your income increases, you buy more of the normal good and so there is a positive relationship.
What is the relationship between income and demand with an inferior good?
When your income increases you buy less of the good and so there is a negative relationship.
Exceptions to the Law of Demand?
A veblen good and a giffen good
What is a veblen good?
A good that shows status or prestige. So when your income increases you buy more.
What is a giffen good?
A very inferior good. Not ever inferior good is giffen, but every giffen good is inferior.
To demand something you must:
- Want it
- Afford it
- Be able to get it
What do we look at with ∆Qd?
Cause - ONLY the change in the price of the good itself
Graph - A movement along the same demand curve
In what ways can you read a demand curve where P is at 5 when Qd is at 10?
- When the price is 5 we are willing to buy 10 units
2. We are willing to pay 5 for the 10th unit
A movement left along the demand curve is…
in terms of Qd
A decrease in Qd
A movement right along the demand curve is…
in terms of Qd
An increase in Qd
What do we look at with ∆D?
Cause - ∆ in any other factor
Graph - A shift of the entire demand curve, a horizontal movement.
What does a shift of the D.C. down to the left mean?
A decrease in Qd at each price level
What does a shift of the D.C. up to the right mean?
An increase in Qd at each price level.
What is the label of the new D.C. when there is a shift?
D1
How are D and D1 related?
They are parallel.
How do we distinguish between types of firms?
Competition.
Where does competition come from?
The availability of substitutes
What is on the lower end of types of markets
Monopolies - lack of substitutes
What is on the higher end of types of markets
Perfect competition - perfect substitutes, producing the same product
