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Prelim Economics > Demand > Flashcards

Demand Flashcards

1
Q

Factors affecting DEMAND (6)

A
  1. Price of the good
  2. Price of complements/substitutes
  3. Expected future prices
  4. Changes in consumer tastes
  5. Level of income
  6. Size of populations and age distribution
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2
Q

Ceteris Paribus and use…

A

Other things being equal (used to isolate relationship between economic variables)

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3
Q

Contraction of demand + appearance on graph

A

When an increase of price causes decrease in demand. (Movement up the existing curve.)

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4
Q

Expansion of demand + appearance

A

When decrease of price cause increase in demand. (Movement down the existing curve.)

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5
Q

Increase in demand + appearance

A

More demanded NOT due to price (new curve further out)

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6
Q

Decrease in demand + appearance

A

Less demanded not due to price ( new curve closer in)

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7
Q

Meanings of increase/decrease in demand.

A

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.

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8
Q

Price elasticity definiton.

A

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.

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9
Q

Elastic demand

A

Strong response to change in price.

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10
Q

Unit elastic demand

A

Proportional response to a price change ( amount spent by consumers totally stays the same.)

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11
Q

Inelastic demand

A

A weak response to price change.

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12
Q

The importance of knowing demand elasticity to business…

A

Helps them determine their OPTIMAL PRICING STRATEGY

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13
Q

The importance of knowing demand elasticity to government…

A
  • 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)
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14
Q

Why do government charge indirect taxes on inelastic items…

A

So that sales don’t drop and they still get revenue.

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15
Q

The best way to calculate demand elasticity…

A

Total outlay method.

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16
Q

If total outlay moves in the same direction as price change…

A

Relatively inelastic

17
Q

Total outlay moves in opposite direction to price change…

A

Relatively Elastic

18
Q

Pricing strategy (business) if demand is elastic…

A

Drop price - proportionately larger increase in sales

19
Q

Pricing strategy (business) if demand is inelastic…

A

Raise price - sold amount won’t drop as much.

20
Q

Definition of Perfectly Elastic Demand… + appearance

A

Consumers will demand an infinite amount at a certain price, but nothing above it. Horizontal Line.

21
Q

Definition of Perfectly inelastic demand + appearance

A

Consumers will pay any price to obtain a given quantity of goods. Vertical line.

22
Q

Factors affecting demand elasticity… (5)

A
  1. Whether it’s a luxury or necessity
  2. Whether it has any close substitutes
  3. Expenditure on the good as a proportion of total income.
  4. The length of time subsequent to price change.
  5. Whether it is habit forming or not.
  6. Durability of product
23
Q

How “Whether it’s a luxury or necessity” affects elasticity…

A

Luxury elastic… (price rise in yachts people go without)

Necessity inelastic… (price rise in bread people still buy)

24
Q

How “Whether it has any close substitutes” affects elasticity…

A

Things with close subsititues… highly elastic (price rise, people switch)
No substitutes…price rise - people have no choice (eg Town water supply)

25
Q

How “Expenditure on the good as a proportion of total income” affects demand elasticity…

A 
Large proportion (eg Car) - elastic
Small proportion (eg Ciggy Lighter) - inelastic
26
Q

How “The length of time subsequent to price change” affects demand elasticity…

A

When price changes, consumers take time to become aware and (potentially) switch products. Price change - inelastic - timepass - elastic.

27
Q

How “Whether it is habit forming or not” affects demand elasticity…

A

Habit forming (eg Booze) - inelastic - people must maintain addiction

28
Q

How “Durability of a good” affects demand elasticity…

A

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….

Prelim Economics (7 decks)

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