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Microeconomics > Nature of demand > Flashcards

Nature of demand Flashcards

1
Q

Define profit.

A

total revenue from selling product less total cost of producing it

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2
Q

What do rational consumers aim to maximise?

A

their utility

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3
Q

Define demand.

A

quantity of good or service that consumers are willing and able to buy at any given price in a given period

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4
Q

What are the four key influences on demand?

A
  • price of good or service
  • price of other goods or services
  • income
  • preferences
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5
Q

Define marginal utility.

A

additional utility gained from consuming an extra unit of a good or service

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6
Q

Explain diminishing marginal utility.

A

The marginal utility from consuming a good usually declines as you consumer more of it.

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7
Q

What is the law of demand?

A

There is an inverse relationship between quantity demanded and proce of a good or service, ceteris paribus.

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8
Q

What does a demand curve show?

A

how much of a good or service will be demanded by consumers at any given price

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9
Q

What two effects make the demand curve downward sloping?

A
  • real income effect (at higher price, consumer has less income left)
  • substitution effect (at higher price, other goods relatively more attractive)
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10
Q

Is an increase in demand shown by move in demand curve or move along demand curve?

A

move in demand curve

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11
Q

Is an extension of demand shown by move in demand curve or move along demand curve?

A

move along demand curve

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12
Q

Why do demand curves sometimes slope upwards?

A

Snob effect or Veblen effect - where people value others knowing they are rich enough to affor a good with a high price, eg Rolex

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13
Q

Define a normal good.

A

a good where quantity demanded increases with consumer incomes

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14
Q

Define an inferior good

A

a good where quantity demanded falls with consumer incomes

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15
Q

Define a Giffen good.

A

a good where the real income effect is stronger than the substitution effect, so a price fall leads to lower demand

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16
Q

Define substitute goods.

A

Where demand for one is likely to rise if price of other rises.

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17
Q

Define complements.

A

Where demand for one is likely to fall if price of other rises.

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18
Q

Define elasticity.

A

a measure of sensitivity of one variable to changes in another variable

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19
Q

What does price elasticity of demand measure?

A

sensitivity of quantity demanded to change in price of good or service

20
Q

What is the formula for price elasticity of demand ?

A

% change in quantity demanded
/ % change in price

21
Q

Define elastic.

A

when 1 < abs(elasticity) < infinity

22
Q

Define inelastic.

A

when 0 < abs(elasticity) < 1

23
Q

Define unitary elastic.

A

when abs(elasticity) = 1

24
Q

Is price elasticity of demand normally positive or negative?

A

negative

25
Q

What values can PED take when demand is inelastic?

A

-1 < PED < 0

26
Q

What values can PED take when demand is elastic?

A

PED < -1

27
Q

If PED is elastic and price increases, what happens to total revenue?

A

It falls.

28
Q

If PED is inelastic and price increases, what happens to total revenue?

A

It rises.

29
Q

If PED is inelastic and price falls, what happens to total revenue?

A

It falls.

30
Q

If PED is elastic and price falls, what happens to total revenue?

A

It rises.

31
Q
A
32
Q

If demand is perfectly inelastic, what happens to demand if the price rises?

A

no change

33
Q

What value does PED have if demand is perfectly inelastic?

A

0

34
Q

What value does PED have if demand is perfectly elastic?

A

infinity

35
Q

What are the four key influences on PED?

A
  • availability of substitutes
  • whether item is perceived as necessity or luxury
  • relative share of the good or service in overall expenditure
  • time period
36
Q

What does income elasticity of demand (YED) measure?

A

sensitivity of quantity demanded to change in consumer income

37
Q

If a good is a necessity, what possible values can YED have?

A

0 < YED < 1

38
Q

If a good is a luxury, what possible values can YED have?

A

YED > 1

39
Q

What is the formula for income elasticity of demand?

A

YED =
% change in quantity demanded
/ % change in consumer income

40
Q

If YED < 0, is the good normal or inferior?

A

inferior

41
Q

If YED > 0, is the good normal or inferior?

A

normal

42
Q

What does cross elasticity of demand (XED) measure?

A

sensitity of quantity demanded to a change in the price of another good or service

43
Q

What is the formula for cross elasticity of demand?

A

XED =
% change in quantity demanded of good X
/ % change in price of good Y

44
Q

If XED > 0, are the good substitutes or complements?

A

substitutes

45
Q

If XED < 0, are the good substitutes or complements?

A

complements

Microeconomics (15 decks)

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