Demand Flashcards
Quantity demanded is
quantity of good people will buy at today’s price
Demand function is
quantity of a good people would buy in a given period
The demand curve shows
relationship between price and quantity demanded
The law of demand states
Price and demand quantity have a inverse relationship (downward sloping)
Substitution effect
Other things will have better value if price increases
Income effect
Less disposable income if price goes up
How does demand relate to MRS?
downward slope of the demand curve reflects diminishing MRS. As the consumer has more of the good, additional units
are valued less highly and the consumer will only buy them if the price is lower
The market demand curve is
obtained by
summing horizontally
over the individual demand curves
How do non-price factors change the demand curve?
Whole curve shifts
Difference between normal and inferior goods
Normal - buy more if real income increases
Inferior - buy less if real income increases
Demand elasticity measures
How much demand changes when prices or incomes change
3 factors that impact demand elasticity
- Number of substitutes (product class - low, product - high)
- Proportion of income spent on good
3, Timescale - long term = more elastic
How does income elasticity vary with a normal, inferior, luxury and necessity good?
+ve, -ve, >1, <1
How can we differentiate between a normal or inferior good using demand curves?
Increasing income will lead to less quantity of the inferior good purchased
Revenue =
Price/unit * Number units sold
How does total revenue change if you reduce the price of an elastic vs inelastic good?
Elastic - stays the same
Inelastic - decreases
The mark-up is the difference between
price of product and cost of production
Inverse demand (marginal willingness to pay) shows
How much we valued last unit bought
Consumer surplus is the difference between
the maximum amount a consumer would be willing to pay for her or his actual level of consumption and what they actually pay
Price discrimination is when
a firm charges different
prices to different consumers for similar goods
First Degree Price Discrimination is when you
Charge a separate price to each customer
Second Degree Price Discrimination
Price depends on how much you buy
Third Degree Price Discrimination is when
The company divides the market into two (or more) groups with different demand functions - set eligibility rules e.g. student discount
