Demand Flashcards
What is the law of demand?
When the price of a good rises, the quantity demanded falls
What is the substitution effect?
When consumers switch their purchases to substitutes, eg normal pizza is too expensive so buy from a different brand
What is the income effect?
When the consumers can buy less products with their income, eg fall in income means they can’t buy as much goods as before
Is the substitution effect negative or positive?
Always negative as the change in quantity demanded is opposite the change in price
Is the income effect negative or positive?
It can be negative or positive
What does a demand curve show?
It shows the relationship between the price and quantity demanded at all possible prices
What is effective demand?
When the quantity demanded is the amount that a consumer is willing and able to buy at a given price
What axis is the price on on a demand curve?
Vertical axis
What is the equation of a demand curve?
Q=a-bP
What are the determinants of demand?
Price level, income, price of other goods, the no. of customers in the market, other factors
What are the 5 types of products?
Normal and inferior products, substitutes, complements and unrelated
What happens to demand when there are normal products?
Demand increases as income increases
What happens to demand when there are inferior products?
Demand falls as income increases (for better quantity products)
What are substitutes?
Products of competitors
What does a price increase of a substitute goods cause?
It causes an increase in the quantity demanded of the good in question
What are complements?
Products used in conjunction with each other
What does a price increase of complement goods cause?
It causes a decrease in the quantity demanded of the good in question, eg people won’t buy tea without milk
What does unrelated mean?
No relationship between products
What does a price increase of unrelated goods cause?
It has no effect on the quantity demanded of the good in question
What are other factors that effect a demand curve?
Tastes/preferences, income distribution, expectation of future price changes, upward sloping demand curves, derived demand
What causes a movement along the demand curve?
If there is a change in the price of a good. This causes a change in quantity demanded but not a change in demand
What causes a shift of the demand curve?
If there is a change in one of the other determinants (not price). This causes a change in demand
What happens if there is a shift to the right of the demand curve?
At the same price there is an increase in the quantity demanded, so an increase in demand
What are the reasons for an increase in demand?
Consumers’ tastes change in favour of the good, there is a rise in the price of a substitute, there is a fall in the price of a complement, incomes rise and the good is normal or incomes fall, and the price is inferior
What is the downward sloping demand curve derived from?
The law of diminishing marginal utility
What is total utility?
Total satisfaction from the consumption of a product
What is marginal utility?
Measures the extra utility from consuming an additional unit of a product
What is diminishing marginal utility?
The extra utility of consuming an additional unit diminishes if you consume more and more of the product
What is market demand?
The demand of all consumers together for a certain product, it is the horizontal sum of the individual consumers’ demand curves
