Demand and Elasticities Flashcards

1
Q

why does the demand curve slope down

A

because of diminishing marginal utility
each extra unit a consumer buys decreases in utility, so they are willing to pay lower prices for each additional good that they buy

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2
Q

non-price determinants of demand which cause shifts

A
change in demographic
change in income
change in substitute goods prices
natural disasters/natural impacts
change is preferences due to advertising
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3
Q

what is a normal good

A

a good which will be more demanded if income increases

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4
Q

what is an inferior good

A

less demand when income increases

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5
Q

what is a substitute good and what are the relationships

A

an alternative to another good, if the price of one goes up the demand for it will fall and the demand for substitute will increase

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6
Q

what is a complementary good and relationship

A

goods used together, joint demand

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7
Q

what is derived demand

A

demand in a good used to make another good eg demand for wood increases when demand for fencing

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8
Q

what is composite demand

A

demand for a good which has more than one use eg oil makes plastic and petrol

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9
Q

PED formula

A

percentage change in QD/percentage change in P

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10
Q

YED formula

A

percentage change in QD/percentage change in real income

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11
Q

XED formula

A

percentage change in QD of A/percentage change in price of good B

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12
Q

elasticity of demand definition

A

the responsiveness of demand to a change in price

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13
Q

YED definition

A

the responsiveness of demand to a change in income

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14
Q

XED definition

A

the responsiveness in demand of a good to a change in price of another good

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15
Q

types of PED

A

elastic, inelastic, unit elastic

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16
Q

perfectly elastic value

A

+/- infinity

17
Q

perfectly inelastic value

A

0

18
Q

elastic demand value and meaning

A

PED>1 meaning change in price will cause a larger change in demand

19
Q

inelastic demand value and meaning

A

PED between 0 and 1 change in price causes smaller change in demand

20
Q

unitary elasticity value

A

1

21
Q

income elastic value

A

YED>1 (luxury good)

22
Q

income inelastic value

A

YED<1

23
Q

perfectly inelastic YED

A

YED=0

24
Q

inferior good YED

A

YED<0 (negative)

25
Q

XED for substitutes

A

XED>0 (positive)

26
Q

XED for complements

A

XED>0 (negative)

27
Q

factors affecting elasticities of demand

A

S- substitutes (more substitutes = more elastic)
P- Percentage of income
L- luxury/necessity
A- addictive/habit forming
T- time period (long term becomes fore elastic as it becomes easier to change to alternatives, and habits can change)

28
Q

uses of elasticities for firms and governments

A

sales levels can be predicted
safer because can supply range of YEDs so safe in a recession (risk spreading)
knowing what to do when complementary or substitute goods change price