Microeconomics - L6 Law of Demand Flashcards
What is a market?
A place or situation where buyers and sellers of goods and services come together to exchange a good or service.
Eg. SEEK, Amazon, Stockland Wendouree, Farmers Markets, Chadstone, Facebook marketplace
What is the price or market mechanism?
The price or market mechanism describes how the forces of demand and supply influence prices of goods and services, which then coordinates the way productive resources are allocated in the economy.
Define ‘Demand’
The ability and willingness of consumers to purchase goods and services.
What does the law of demand state?
As the quantity demanded increases, the price decreases.
As the quantity demanded decreases, the price increases.
List the 5 demand non-price factors that influence price and quantity
- Change in level of disposable income
- Change in taste or preference
- Interest rates
- Price of subsititutes
- Price of compliments
What is disposable income?
The total income that households receive in exchange for their participation in the production process, plus government transfers, less taxes.
What will happen to demand if:
a. Disposable income increases?
b. Disposable income decreases?
a. Demand will increase
b. Demand will decrease
What are interest rates?
Interest rates are the cost of borrowing and/or the incentive to save.
What will happen to demand if:
a. Interest rates go up?
b. Interest rates go down?
a. Demand will decrease because the cost of borrowing money (taking out a loan) has gone up (repayments have increased). People will be more inclined to save instead.
b. Demand will increase because the cost of borrowing money has gone down. Loan repayments have decreased.
What is a substitute?
An alternate good or service that can be used for the same purpose?
Eg. Hot chocolate instead of hot tea.
What will happen to demand for a product (eg. tea) if:
a. The price of a substitute product (hot choc) increases?
b. The price of a substitute product (hot choc) decreases?
a. Demand for tea will increase because the substitute product (hot choc) has become more expensive.
b. Demand for tea will decrease because the substitute product (hot choc) has become less expensive.
What are complements?
Complements are goods or services that are consumed together.
Eg. Milk and coffee, Stapler and staples, Printer and ink, Car and petrol.
What would happen to demand for Milk if:
a. The price of a complement (coffee) were to increase?
b. The price of a complement (coffee) were to decrease?
a. Demand for milk would decrease as less people would choose to buy coffee due to the increase in the price of coffee.
b. Demand for milk would increase as more people would choose to buy coffee due to the decrease in the price of coffee.
