Microeconomics Flashcards
Who sets the price for goods and services and why does it change?
Consumers; Demand
Law of Demand
Consumers will buy more of something if it costs less, and less of something if it costs more
Demand
The desire to own something and have the ability to pay for it
What affects the demand for a product?
Consumers who are willing and able to buy the product
Price Effect
The inclination of people to buy less of something at a higher price than they would at a lower price
Substitution Effect
When the price of items increases, consumers look for substitutes for those items
Income Effect
When the price of goods increases it makes people feel poorer. Income does not increase with prices. When prices increase people have to buy fewer items
What causes shifts in demand?
- Income
- Population
- Consumer Expectations
- Consumer Tastes and Trends
- Substitutions
- Complementary Goods
Income
- Normal Goods: demand increases as income increases
- Inferior Goods: demand decreases as income increases
Population
- Historical Trends
- Senior Trends
Consumer Expectations
- Higher price in future causes demand to increase
- If you know it is going on sale, demand decreases
Consumer Tastes and Trends
- Social Trends
- TV ads
- Internet
- Radio
Price Elasticity
The measure of the impact of a price on a demand for a good
• Indicates the buyers need to buy the good or service
Elastic Demand
When a change in price has a large impact on the demand for the good
- More Substitutes = More Elasticity
Inelastic Demand
When the price of the good increases and the effect on demand is minimal
- Means that this good or service has little to no valuable substitutes
• Despite the increase in price people will still buy the same amount
