Demand Flashcards
Factors affecting DEMAND (6)
- Price of the good
- Price of complements/substitutes
- Expected future prices
- Changes in consumer tastes
- Level of income
- Size of populations and age distribution
Ceteris Paribus and use…
Other things being equal (used to isolate relationship between economic variables)
Contraction of demand + appearance on graph
When an increase of price causes decrease in demand. (Movement up the existing curve.)
Expansion of demand + appearance
When decrease of price cause increase in demand. (Movement down the existing curve.)
Increase in demand + appearance
More demanded NOT due to price (new curve further out)
Decrease in demand + appearance
Less demanded not due to price ( new curve closer in)
Meanings of increase/decrease in demand.
Increase: People will buy more at same price. People will pay more for same quantity
Decrease: People will buy less at same price. People will pay less for same quantity.
Price elasticity definiton.
Measures the responsiveness of the quantity demanded to a change in price. Calculated by the change in quantity demanded divided by the percentage change in price.
Elastic demand
Strong response to change in price.
Unit elastic demand
Proportional response to a price change ( amount spent by consumers totally stays the same.)
Inelastic demand
A weak response to price change.
The importance of knowing demand elasticity to business…
Helps them determine their OPTIMAL PRICING STRATEGY
The importance of knowing demand elasticity to government…
- When pricing goods for the community (eg Public Transport)
- Predict the affects of taxes on products to accurately estimate the revenue they will raise (after the product is made more expensive)
Why do government charge indirect taxes on inelastic items…
So that sales don’t drop and they still get revenue.
The best way to calculate demand elasticity…
Total outlay method.
If total outlay moves in the same direction as price change…
Relatively inelastic
Total outlay moves in opposite direction to price change…
Relatively Elastic
Pricing strategy (business) if demand is elastic…
Drop price - proportionately larger increase in sales
Pricing strategy (business) if demand is inelastic…
Raise price - sold amount won’t drop as much.
Definition of Perfectly Elastic Demand… + appearance
Consumers will demand an infinite amount at a certain price, but nothing above it. Horizontal Line.
Definition of Perfectly inelastic demand + appearance
Consumers will pay any price to obtain a given quantity of goods. Vertical line.
Factors affecting demand elasticity… (5)
- Whether it’s a luxury or necessity
- Whether it has any close substitutes
- Expenditure on the good as a proportion of total income.
- The length of time subsequent to price change.
- Whether it is habit forming or not.
- Durability of product
How “Whether it’s a luxury or necessity” affects elasticity…
Luxury elastic… (price rise in yachts people go without)
Necessity inelastic… (price rise in bread people still buy)
How “Whether it has any close substitutes” affects elasticity…
Things with close subsititues… highly elastic (price rise, people switch)
No substitutes…price rise - people have no choice (eg Town water supply)
How “Expenditure on the good as a proportion of total income” affects demand elasticity…
Large proportion (eg Car) - elastic Small proportion (eg Ciggy Lighter) - inelastic
How “The length of time subsequent to price change” affects demand elasticity…
When price changes, consumers take time to become aware and (potentially) switch products. Price change - inelastic - timepass - elastic.
How “Whether it is habit forming or not” affects demand elasticity…
Habit forming (eg Booze) - inelastic - people must maintain addiction
How “Durability of a good” affects demand elasticity…
Durable goods have more elastic demand.
Eg Car price rise - highly elastic as people would start repairing not buying new…. after a while elasticity declines when cars have to be replaced….
