Determinants of demand Flashcards
demand
Quantity of a good/service consumers are willing and able to buy of a given price in a given time period
Contraction of demand
If price moves up, quantity contracts
factors impacting demand
Population
Quality of product/fashion
Advertising
Consumer incomes
substitutes
interest rates
complementary products.
The number of people going to shops has fallen for the second year in a row, due to cost of living pressures, low consumer confidence and the rise of substitutes(online shopping).
Substitutes
A good with the same purpose as another good e.g. Coca Cola and Pepsi: if the price of Coca Cola goes up, we switch and buy Pepsi instead
interest rates
the cost of borrowing money. In 2025, the Bank of Japan raised short term interest rates to around 0.5 percent, the highest level in 17 years, after accelerating consumer prices during December 2024.
how do interest rates affect demand?
If interest rates go up, people are less willing to borrow money to consume goods, so increasing interest rates will shift the demand curve to the left
examples of complementary products
car and petrol, Iphone and iPhone charger
normal goods/services
if our incomes go up, we demand more of them, but if our incomes go down, we demand less. They help shift the demand curve to the right and left rather smoothly
Normal goods examples
Disneyland, revision books, trainers
inferior goods
Goods where, if our income goes up, we demand less of it , as we go for better quality goods instead
Giffen goods
Goods violating the law of demand(if prices go up, we demand more of it, but if prices go down, we demand less of it)
Examples of giffen goods
An expensive Mona Lisa painting,
Vintage cars
Law of Demand
An inverse relationship between price and quantity demanded. As price increases, quantity decreases and vice versa
Close substitutes
Pepsi and Coca Cola
Substitutes that aren’t very close
A bike and BMW
Price-elasticicity of demand
The responsiveness of the quantity demanded to the changes in price
Price-inelastic demand
If the goods and services don’t respond to changes in prices, no substitutes for these products
Perfectly price-elastic demand
The price remains the same, no matter the quantity
PED=
Percentage change in demanded quantity/percentage change in price
Examples of price inelastic products
Petrol
Perfectly competitive market
A market where the price is set by the market
Are necessities price elastic or price inelastic?
Price inelastic(people will buy these goods no matter what the price)
What’s more price elastic - inferior or normal goods?
Inferior goods
Why is the PED always negative?
When the price decreases, quantity demand increases
What does it show if the price elasticity of demand is negative?
When the price rises, the demand falls
If the PED is greater than 1..
The demand is price elastic
If the PED is less than 1..
The demand is price inelastic
If the PED is 0…
The demand is perfectly price inelastic
If the PED is infinity…
The demand is perfectly price elastic
If the PED is 1..
The demand is unit price elastic(the proportion of price changes is equal to the proportion of quantity changes).
Price elastic demand
If the goods and services respond to changes in price
How does price elasticity of demand help businesses in the real world?
When they are planning how to price their goods in a shop
Total revenue=
Quantity of products sold x price
Factors that determine whether demand for a good/service is elastic or inelastic:
Number of substitutes
Percentage change of income
Luxury/necessity
Addictive/Habit formations
Time period
How does time period impact elasticity?
In the short run, products are price inelastic, as well as the factors of production(Labour, Land,Capital).
In the long run, products become more price elastic
