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Paper 1 Economics > Demand theory revisited > Flashcards

Demand theory revisited Flashcards

Consumer behaviour -> Individual economic decision making -> Microeconomics

1
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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2
Q

Market Demand vs. Individual Demand

How is the market demand curve derived?

A

By summing all individual demand curves.

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3
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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4
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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5
Q

Law of Demand

What happens to quantity demanded as price falls?

A

Quantity demanded increases.

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6
Q

Law of Demand

What happens to quantity demanded as price rises?

A

Quantity demanded decreases.

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7
Q

Law of Demand

How is the law of demand represented graphically?

A

By a downward-sloping demand curve.

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8
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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9
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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10
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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11
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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12
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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13
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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14
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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15
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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16
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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17
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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18
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.

19
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.

20
Q

Factors Influencing Demand (Conditions of Demand)

How does population and demographics influence demand?

A

Larger or more specific consumer groups can shift demand.

21
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.

22
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.

23
Q

Elasticity of Demand

What does price elasticity of demand (PED) measure?

A

The responsiveness of quantity demanded to changes in price.

24
Q

Elasticity of Demand

What is elastic demand?

A

When PED > 1, typically for luxury goods.

25
Q

Elasticity of Demand

What is inelastic demand?

A

When PED < 1, typically for necessities.

26
Q

Elasticity of Demand

What does income elasticity of demand (YED) measure?

A

The responsiveness of demand to changes in income.

27
Q

Elasticity of Demand

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

A

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

28
Q

Additional Concepts

What is consumer surplus?

A

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

29
Q

Additional Concepts

What is diminishing marginal utility?

A

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

30
Q

Applications of Demand Theory

How does demand behave in consumer goods markets for luxury goods?

A

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

31
Q

Applications of Demand Theory

How does demand behave in consumer goods markets for necessities?

A

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

32
Q

Applications of Demand Theory

How does demand for labour respond to wages?

A

As wages decrease, firms demand more labour.

33
Q

Applications of Demand Theory

What influences housing market demand?

A

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

34
Q

Applications of Demand Theory

How does demand behave in healthcare?

A

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

35
Q

Applications of Demand Theory

How do network effects influence demand in technology markets?

A

Demand increases as user bases grow.

36
Q

Economic Issues in Demand Theory

How does price elasticity affect revenue?

A

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

37
Q

Economic Issues in Demand Theory

What are potential issues with subsidies?

A

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

38
Q

Economic Issues in Demand Theory

How does income distribution relate to demand?

A

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

39
Q

Economic Issues in Demand Theory

What role does speculative demand play in markets?

A

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

40
Q

Economic Issues in Demand Theory

How does behavioral economics challenge traditional demand theory?

A

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

41
Q

Evaluation of Demand Theory

What are the strengths of demand theory?

A

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

42
Q

Evaluation of Demand Theory

What are the weaknesses of demand theory?

A

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

43
Q

Evaluation of Demand Theory

How can demand theory be improved?

A

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

44
Q

Evaluation of Demand Theory

What is the overall conclusion about demand theory?

A

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

Paper 1 Economics (25 decks)

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