Demand theory revisited Flashcards
Consumer behaviour -> Individual economic decision making -> Microeconomics
Market Demand vs. Individual Demand
What does the market demand curve represent?
The total quantity of a good or service demanded by all consumers in the market at various prices
Market Demand vs. Individual Demand
How is the market demand curve derived?
By summing all individual demand curves.
Market Demand vs. Individual Demand
What does the individual demand curve represent?
The quantity of a good or service a single consumer demands at various prices.
Law of Demand
What is the law of demand?
There is an inverse relationship between the price of a good and the quantity demanded, ceteris paribus.
Law of Demand
What happens to quantity demanded as price falls?
Quantity demanded increases.
Law of Demand
What happens to quantity demanded as price rises?
Quantity demanded decreases.
Law of Demand
How is the law of demand represented graphically?
By a downward-sloping demand curve.
Movements Along vs. Shifts in the Demand Curve
What causes movements along the demand curve?
Changes in the good’s own price.
Movements Along vs. Shifts in the Demand Curve
What is an extension of demand?
Movement down the curve due to a price decrease.
Movements Along vs. Shifts in the Demand Curve
What is a contraction of demand?
Movement up the curve due to a price increase.
Movements Along vs. Shifts in the Demand Curve
What causes shifts in the demand curve?
Changes in non-price factors (conditions of demand).
Movements Along vs. Shifts in the Demand Curve
What does a rightward shift in the demand curve indicate?
An increase in demand at every price level.
Movements Along vs. Shifts in the Demand Curve
What does a leftward shift in the demand curve indicate?
A decrease in demand at every price level.
Factors Influencing Demand (Conditions of Demand)
How does income affect demand for normal goods?
Demand increases as income increases.
Factors Influencing Demand (Conditions of Demand)
How does income affect demand for inferior goods?
Demand decreases as income increases.
Factors Influencing Demand (Conditions of Demand)
How do tastes and preferences influence demand?
They are influenced by trends, culture, advertising, etc.
Factors Influencing Demand (Conditions of Demand)
What happens to the demand for substitutes if the price of one increases?
Demand for the other increases.
Factors Influencing Demand (Conditions of Demand)
What happens to the demand for complements if the price of one decreases?
Demand for the other increases.
Factors Influencing Demand (Conditions of Demand)
How do expectations about future prices or income affect current demand?
They can increase or decrease current demand.
Factors Influencing Demand (Conditions of Demand)
How does population and demographics influence demand?
Larger or more specific consumer groups can shift demand.
Examples of Demand Curve Shifts
What could cause a rightward shift in the demand curve?
A successful advertising campaign, a fall in the price of complementary goods, or an increase in consumer income for normal goods.
Examples of Demand Curve Shifts
What could cause a leftward shift in the demand curve?
A fall in consumer income for normal goods or a rise in the price of complementary goods.
Elasticity of Demand
What does price elasticity of demand (PED) measure?
The responsiveness of quantity demanded to changes in price.
Elasticity of Demand
What is elastic demand?
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.
