Demand theory revisited Flashcards by Po-Ba’s Profile

Q

Market Demand vs. Individual Demand

What does the market demand curve represent?

A

The total quantity of a good or service demanded by all consumers in the market at various prices

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Q

Market Demand vs. Individual Demand

How is the market demand curve derived?

A

By summing all individual demand curves.

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Q

Market Demand vs. Individual Demand

What does the individual demand curve represent?

A

The quantity of a good or service a single consumer demands at various prices.

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Q

Law of Demand

What is the law of demand?

A

There is an inverse relationship between the price of a good and the quantity demanded, ceteris paribus.

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Q

Law of Demand

What happens to quantity demanded as price falls?

A

Quantity demanded increases.

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Q

Law of Demand

What happens to quantity demanded as price rises?

A

Quantity demanded decreases.

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Q

Law of Demand

How is the law of demand represented graphically?

A

By a downward-sloping demand curve.

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Q

Movements Along vs. Shifts in the Demand Curve

What causes movements along the demand curve?

A

Changes in the good’s own price.

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Q

Movements Along vs. Shifts in the Demand Curve

What is an extension of demand?

A

Movement down the curve due to a price decrease.

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Q

Movements Along vs. Shifts in the Demand Curve

What is a contraction of demand?

A

Movement up the curve due to a price increase.

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Q

Movements Along vs. Shifts in the Demand Curve

What causes shifts in the demand curve?

A

Changes in non-price factors (conditions of demand).

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Q

Movements Along vs. Shifts in the Demand Curve

What does a rightward shift in the demand curve indicate?

A

An increase in demand at every price level.

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Q

Movements Along vs. Shifts in the Demand Curve

What does a leftward shift in the demand curve indicate?

A

A decrease in demand at every price level.

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Q

Factors Influencing Demand (Conditions of Demand)

How does income affect demand for normal goods?

A

Demand increases as income increases.

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Q

Factors Influencing Demand (Conditions of Demand)

How does income affect demand for inferior goods?

A

Demand decreases as income increases.

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Q

Factors Influencing Demand (Conditions of Demand)

How do tastes and preferences influence demand?

A

They are influenced by trends, culture, advertising, etc.

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Q

Factors Influencing Demand (Conditions of Demand)

What happens to the demand for substitutes if the price of one increases?

A

Demand for the other increases.

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Q

Factors Influencing Demand (Conditions of Demand)

What happens to the demand for complements if the price of one decreases?

A

Demand for the other increases.

Q

Factors Influencing Demand (Conditions of Demand)

How do expectations about future prices or income affect current demand?

A

They can increase or decrease current demand.

Q

Factors Influencing Demand (Conditions of Demand)

How does population and demographics influence demand?

A

Larger or more specific consumer groups can shift demand.

Q

Examples of Demand Curve Shifts

What could cause a rightward shift in the demand curve?

A

A successful advertising campaign, a fall in the price of complementary goods, or an increase in consumer income for normal goods.

Q

Examples of Demand Curve Shifts

What could cause a leftward shift in the demand curve?

A

A fall in consumer income for normal goods or a rise in the price of complementary goods.

Q

Elasticity of Demand

What does price elasticity of demand (PED) measure?

A

The responsiveness of quantity demanded to changes in price.

Q

Elasticity of Demand

What is elastic demand?

A

When PED > 1, typically for luxury goods.

# Elasticity of Demand What is inelastic demand?

When PED < 1, typically for necessities.

# Elasticity of Demand What does income elasticity of demand (YED) measure?

The responsiveness of demand to changes in income.

# Elasticity of Demand What is cross-price elasticity of demand (XED)?

It measures the responsiveness of demand for one good to changes in the price of another.

# Additional Concepts What is consumer surplus?

The difference between what consumers are willing to pay and what they actually pay.

# Additional Concepts What is diminishing marginal utility?

The additional satisfaction from consuming an extra unit decreases as consumption increases.

# Applications of Demand Theory How does demand behave in consumer goods markets for luxury goods?

High price elasticity; small price reductions can significantly increase demand.

# Applications of Demand Theory How does demand behave in consumer goods markets for necessities?

Low price elasticity; even significant price increases result in relatively stable demand.

# Applications of Demand Theory How does demand for labour respond to wages?

As wages decrease, firms demand more labour.

# Applications of Demand Theory What influences housing market demand?

Income changes, interest rates, and government policies like subsidies or tax credits.

# Applications of Demand Theory How does demand behave in healthcare?

Inelastic for life-saving treatments; small price changes may have minimal impact.

# Applications of Demand Theory How do network effects influence demand in technology markets?

Demand increases as user bases grow.

# Economic Issues in Demand Theory How does price elasticity affect revenue?

Lowering prices increases revenue for elastic demand; raising prices increases revenue for inelastic demand.

# Economic Issues in Demand Theory What are potential issues with subsidies?

They can encourage overconsumption or inefficiency, conflicting with sustainability goals.

# Economic Issues in Demand Theory How does income distribution relate to demand?

Demand for inferior goods highlights inequality; as incomes rise, consumption shifts away from these goods.

# Economic Issues in Demand Theory What role does speculative demand play in markets?

It can lead to bubbles, detaching demand from fundamental values.

# Economic Issues in Demand Theory How does behavioral economics challenge traditional demand theory?

Consumers may act irrationally, influenced by biases like anchoring or herd behavior.

# Evaluation of Demand Theory What are the strengths of demand theory?

Predictive power, flexibility, and integration with other theories like supply and elasticity.

# Evaluation of Demand Theory What are the weaknesses of demand theory?

Assumption of rationality, exclusion of externalities, and its static nature.

# Evaluation of Demand Theory How can demand theory be improved?

By incorporating behavioral insights, developing dynamic models, and applying insights for equitable policies.

# Evaluation of Demand Theory What is the overall conclusion about demand theory?

It provides a foundational framework for understanding consumer behavior and market interactions but requires enhancements for contemporary challenges.