Demand and the Demand Curve Flashcards
What is demand?
The quantity of a good/service consumers are willing and able to by at a given price in a given time period.
What is the Law of Demand?
There is an inverse relationship between price and quantity demanded. As price increases, quantity demanded decreases and vice versa.
What is ceterus paribus?
All other factors remain unchanged.
What is the income effect?
When prices rise, then the purchasing power of one’s income doesn’t go as far and therefore we are less able to buy the same quantity of goods and services as before and demand therefore contracts.
What is the substitute effect?
As prices go up, other goods and services in competitive demand become more price competitive so people choose to buy one of the substitutes instead.
What is a contraction of demand?
When price increases, we move along the curve to a lower quantity demanded.
What is an extension/expansion of demand?
When price decreases, we move along the curve to a higher quantity demanded.
What do non-price factors do to the demand curve?
They shit the demand curve in/out or right/left.
What are the non-price factors that can affect demand?
Population
Advertising
Substitute’s price
Income- normal/inferior goods
Fashion/trends
Interest rates
Complement’s price
How does population affect demand?
Increasing population = demand shifts out
How does advertising affect demand?
Positive advertising = demand shifts out
How does a substitute’s price affect demand?
Price of a substitute increases = demand shifts out
How does income affect demand?
Incomes rise = demand shifts out for normal goods, demand shifts in for inferior goods
How does fashion trends affect demand?
Good/service in fashion = demand shifts out
How do interest rates affect demand?
Higher interest rates = demand shifts in
