Markets/Price determination Flashcards
demand
The desire and willingness to purchase a product at a given price
effective demand
willingness and ability to purchase a product at a given price
law of diminishing marginal utility
the utility gained from extra units of good is lower when you have many units already
law of demand
inverse relationship with quantity demanded and price
what are exceptions to the law of demand
when price increases demand increases
veblen goods
consumers may view higher prices as a sign of better product quality, this is usually seen in luxury goods
- high end watches and cars, gives them a feel of wealth
Speculative goods
when the price of a good increases, investors may believe that the price will continue to increase and so they invest in it.
what factors cause a demand to shift
- changes in the price of a substitute
- changes in the price of a complementary good
- changes in real income
- change in fashion - taste and preferences
- marketing
Substitute good
if the price of good X increases the demand for good Y will increase
complementary good
if the price of good X increases the demand for good Y decreases
real income
The value of incomes received after allowing for inflation.
-the moneys purchasing power
changes in real income - normal good
demand for normal goods increases when income increases. most goods are normal goods
changes in real income - inferior good
demand for inferior goods decreases when real incomes increase
inferior goods are sub standard goods
Example of an inferior good
groceries
changes in fashion and marketing
inward shift (left) is caused by something going out of fashion or receiving less marketing
An elasticity measures…
How much a variable changes when another variable changes
Price elasticity of demand measures… (PED)
The responsiveness of quantity demand to changes in price
PED formula
% change in price
What does the elasticity formula measure
An elasticity measures how much the top variable changes due to a change in the bottom variable
perfectly inelastic PED value
0
inelastic PED value
0 > PED > -1
unit elastic PED value
-1
elastic PED value
-1 > PED > -infinity
perfectly elastic PED value
- infinity
elastic demand definition
When the percentage change in demand is greater than the percentage change in price.
inelastic demand definition
When the percentage change in demand is less than the percentage change in price.
Unitary demand defintion
When the percentage change in quantity demanded is equal to the percentage change in price.
what does Income elasticity of demand measure
measures the responsiveness of a variable to changes in another variable
Income elasticity of demand definition
Measures the responsiveness of demand to changes in income
What is Y
income
YED
proportionate change in Y
real income changes
the amount of purchasing power consumers have will affect demand for all products
how is demand effected when real income increases
demand for normal goods goes up
demand for inferior goods goes down
relationship with demand for normal goods and real income changes
direct relationship
increase income causes an outward shift in demand
when is YED > then 0
real income increases, Qd is positive and Y is positive
positive number
YED = —————————–
positive number
YED > 0 when incomes increases
normal good
relationship with demand for inferior goods and real income changes
inverse relationship
increase in income causes an inward shift
When is YED < 0
real incomes decrease, QD are negative and Y is positive
YED = negative number / positive number
YED < 0 when incomes decrease
how does demand change for necessary goods
demand rises slowly as incomes rises
0<YED<1
How does demand change for luxury goods
Demand rises quickly as income increases
YED > 1
Normal goods examples
- necessary goods
- luxury goods
XED stand for
cross elasticity of demand
What does XED measure
measure responsiveness of demand to changes in the price of another good
XED equation
proportionate change in PB
A = good A
B = good B
Substitute goods
if the price of good x increases, demand for good Y increases
How do we use XED to measure a substituted good
if price of good B increases, QDA is positive and PB is positive
XED = positive Qda / positive Pb = >0
> 0 = subsitiute good
Complementary goods
if the price of good x increases, the demand for good Y decreases
How can we use XED to measure a complemantary good
if price of good B increases, QDA is negative and PB is positive
XED = negative QDA / positive PB = < 0
< 0 = complemtary good
