Demand Flashcards
What is Demand?
Demand refers to the quantity of a commodity a consumer is able and willing to buy at a given price, during a given period of time.
What is the law of demand?
The law of demand states that the quantity demanded of a commodity rises with the fall in its price and the quantity demanded falls when the price of commodity rises, ceteris paribus.
What are the factors affecting demand/deteriminants of demand/demand function?
1. Price of Commodity - There is an inverse relationship between the price of the commodity and its quantity demanded. It imples that with the rise in price of the commodity its quantity demanded falls, ceteris paribus, and with the fall in price of commodity its quantity demanded increases, ceteris paribus.
2. Price of Related Goods - The goods in which a change in price of one good causes a change in demand of the other good, are known as related goods. The goods demanded may be in the form of Subsitute goods, Complementary Goods.
3. Income of Consumer - The demand for a commodity is also affected with the change in income of consumer. The goods demaned may be in the form of Normal Goods and Inferior Goods.
4. Taste and Preferences of Consumer - A change in taste and preferences of the consumer may also affect the demand for a commodity. The demand for a commodity will increase when a consumer develops a favourable change in taste/preferences for a commodity, ceteris paribus, and the demand for a commodity will fall when a consumer develops a unfavourable change in taste/preferences for a commodity, ceteris paribus.
5. Expected Future Price - The expected future price of a commodity may also affect the demand for a commodity. When the expected future price of a commodity in the near future increases, then the current demand of the commodity increases, ceteris paribus. On the contrary, when the expected future price of a commodity in the near future decreases,then thecurrent demandof the commoditydecreases, ceteris paribus.
What are the factors affecting market demand?
- Population
- Distribution of Income
- Season and Climate
Explain how price of related goods affects demand.
Price of Related Goods - The goods in which a change in price of one good causes a change in demand of the other good, are known as related goods. The goods demanded may be in the form of Subsitute goods, Complementary Goods.
1. Subsitute Goods - The goods that can be used in place of one an other are known as subsitute goods, eg. Coke and Pepsi OR
When the demand for Good X rises due to a rise in price of Good Y, the goods are known as Subsitute Goods.
Subsitute goods share a positive relation, ceteris paribus.
2. Complimentary Goods - The goods that are demanded jointly in order to satisfy a given want are known as Complimentary Goods, eg; Automobile and Petroleum OR
When the demand for Good X rises due to a fall in price of Good Y, the goods are known as Complimentary Goods.
Complimentary Goods share a positve relation, ceterius paribus.
In complimentary goods graph, price decreases and demand curve shifts rightwards.
What are subsitute goods?
Subsitute Goods - The goods that can be used in place of one an other are known as subsitute goods, eg. Coke and Pepsi OR
When the demand for Good X rises due to a rise in price of Good Y, the goods are known as Subsitute Goods.
Subsitute goods share a positive relation, ceteris paribus.
What are complimentary goods?
Complimentary Goods - The goods that are demanded jointly in order to satisfy a given want are known as Complimentary Goods, eg; Automobile and Petroleum OR
When the demand for Good X rises due to a fall in price of Good Y, the goods are known as Complimentary Goods.
Complimentary Goods share a positve relation, ceterius paribus.
How does income of the consumer affect demand?
Income of Consumer - The demand for a commodity is also affected with the change in income of consumer. The goods demaned may be in the form of Normal Goods and Inferior Goods.
1. Normal Goods - The goods whose demand rises due to a rise in income of the consumer, ceteris paribus, are known as Normal Goods. OR
When the demand for Good X rises, due to a rise in income of consumer, ceteris paribus, the commodity is known as a normal good. Eg:- Branded Clothes
Normal Goods share a direct relationship with income of consumer.
2. Inferior Goods - The goods whose demand rises due to a fall in income of the consumer, ceteris paribus, are known as Inferior Goods. OR
When the demand for Good X rises, due to a fall in income of consumer, ceteris paribus, the commodity is known as a inferior good. Eg:- Non-branded Clothes
Inferior Goods share an inverse relationship with income of consumer.
What is a demand schedule? What are its forms?
Demand Schedule refers to the tabular presentation showing different quantities demanded at different prices, during a given period of time.
It is in the form of:-
1. Individual Demand Schedule - Refers to tabular presentation showing different quantities demanded at different prices, during a given period of time, by a consumer.
2. Market Demand Schedule - Refers to tabular presentation showing different quantities demanded at different prices, during a given period of time, by all the consumers.
What is a demand curve? What are its forms?
Demand Curve refers to the graphical presentation showing different quantities demanded at different prices, during a given period of time.
It is in the form of:-
1. Individual Demand Curve - Refers to graphical presentation showing different quantities demanded at different prices, during a given period of time, by a consumer.
2. Market Demand Curve - Refers to graphical presentation showing different quantities demanded at different prices, during a given period of time, by all the consumers.
Why more is purchased when price falls?
OR
Why is the demand curve downward sloping?
OR
What explains/is the reason behind law of demand?
OR
What causes an inverse relation between Price and Demand?
The law of demand states that the quantity demanded of a commodity rises with the fall in its price and the quantity demanded falls when the price of commodity rises, ceteris paribus.
1. The Law of Diminishing Marginal Utility - The law of DMU states as a consumer in a given time period increases consumption of a commodity, the satsifaction (utility) dervied with each additional (marginal) unit keeps on decreasing (diminishing). Therefore, a consumer will increase consumption only when he as to pay lesser price for each successive unit. Thus, the demand of the commodity will increase until the Marginal Utility equals price of commodity.
2. Income Effect - Ceteris Paribus, when the price of commodity falls the real income (purchasing power) of the consumer increases, which leads to an increase in the demand for the commodity. Thus, with the fall in price, the quantity demanded rises, ceteris paribus, and with the rise in price the quantity demanded decreases, ceteris paribus, as there is a change in the real income of the consumer.
3. Subsitution Effect - There are several commodities which have close subsitutes in the market. When price of commodity rises, its quantity demanded falls as the consumers shift their demand to a subsitute good, and when the price of commodity falls, its quantity demanded rises as consumers shift their demand from subsitute goods to the commoity in question.
What is movement along the same demand curve? Why does it take place?
Movement along the same demand curve, or change in quantity demanded refers to a situation in which the quantity demanded of a commodity changes, due to a change in price, ceteris paribus.
It is in the form of:-
1. Expansion/Extension of Demand - (Downward, Quantity Demanded Rises due to Fall in Price)
2. Contraction of Demand - (Upward, Quantity Demanded Falls due to Rise in Price)
What is Expansion/Extension of Demand?
When the quantity demanded of a commodity rises due to a fall in its price, ceteris paribus, it is known as expansion of demand.
Hence, the downward movement along the same demand curve is known as expansion of demand.
What is Contraction of Demand?
When the quantity demanded of a commodity falls due to a rise in its price, it is known as contraction of demand.
Hence, the upward movement along the same demand curve is known as contraction of demand.
What is shift in the demand curve? Why does it take place?
Shift in demand curve, or change in demand, refers to a situation in which the demand for a commodity changes, due to a change in factors other than price, price of commodity assumed to be held constant.
It is in the form of:-
1. Increase in Demand - (Rightward Shift, Demand Rises)
2. Decrease in Demand - (Leftward Shift, Demand Falls)
What is increase in demand?
When the demand for a commodity increases due to a change in factors other than price of the commodity, it is known as increase in demand.
The demand may increase due to:-
- Rise in price of subsitute good
- Fall in price of complimentary good
- Rise in income of consumer
- Favourable change in taste/preferences for commodity
- Expected rise in future price
Hence, Increase in demand is shown by a rightward shift in demand curve.
What is decrease in demand?
When the demand for a commodity decreases due to a change in factors other than price of the commodity, it is known as decrease in demand.
The demand may increase due to:-
- Fall in price of subsitute good
- Rise in price of complimentary good
- Fall in income of consumer
- Unfavourable change in taste/preferences for commodity
- Expected fall in future price
Hence, Decrease in demand is shown by a leftwardshiftindemand curve.
What is Perfectly Inelastic Demand?
Refers to a situation in which the %age change in price causes no change in quantity demanded.
(Ed = 0, Steepest Slope)
What is Perfectly Elastic Demand?
Refers to a situation in which there is %age change quantity demanded without any corresponding %age change in price.
(Ed = ∞(infinity), Flat Slope)
What is Unitary Elastic Demand?
Refers to a situation in which the %age change in price causes an equal %age change in quantity demanded.
(Ed = 1, 45º Slope)
What is Elastic Demand?
Refers to a situation in which the %age change in price causes greater %age change in quantity demanded.
(Ed > 1, Less steep Slope)
What is Inelastic Demand?
Refers to a situation in which the %age change in price causes lesser %age change in quantity demanded.
(Ed < 1, Steeper Slope)
