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Economics > THEME 1 - Topic 2 - The Nature of Demand > Flashcards

THEME 1 - Topic 2 - The Nature of Demand Flashcards

1
Q

What do consumers aim to do?

A

Maximise utility.

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2
Q

What do producers aim to do?

A

Maximise profits.

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3
Q

What does marginal cost equal?

A

Marginal revenue.

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4
Q

Define Notional demand

A

The desire to possess something.

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5
Q

Define Effective demand

A

The desire to possess something, backed up by the ability to purchase it.

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6
Q

Define demand

A

The quantity of a good/service that consumers choose to buy at any possible price in a given period.

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7
Q

Why is the demand curve downward sloping?

A

Due to the law of Diminishing Marginal Utility.

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8
Q

Define the law of Diminishing Marginal Utility

A

The situation where individuals gain less additional utility from a consuming a product, the more it is consumed.

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9
Q

Define the Demand curve

A

A graph showing the quantity demanded of a good/service at any given price.

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10
Q

What causes a movement along the Demand curve?

A

A change in price.

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11
Q

What does a movement up the Demand curve cause?

A

A contraction in demand.
A decrease in quantity demanded.

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12
Q

What does a movement down the Demand curve cause?

A

An extension in demand.
An increase in quantity demanded.

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13
Q

Define the Law of Demand

A

States that there is an inverse relationship between price and quantity demanded of a good/service following ceteris paribus.

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14
Q

What causes a shift in the Demand curve?

A

A change in anything other than price.

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15
Q

What does a shift left of the Demand curve cause?

A

A decrease in demand.

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16
Q

What does a shift right of the demand curve cause?

A

An increase in demand.

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17
Q

What are the Determinants of Demand?

A

PASIFIC

Population
Advertising
Substitute’s price
Income
Fashion/Taste
Interest rates/Legislation
Complement’s price

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18
Q

Define a normal good

A

Is when the quantity demanded increases in response to an increase in consumer goods.

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19
Q

Define an inferior good

A

Is when the quantity demanded decreases in response to an increase in consumers goods.

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20
Q

Define a substitute

A

2 goods that are in competitive demand. Demand will increase if the price of a substitute increases.

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21
Q

Define a complement

A

2 good that are in joint demand. Demand will decrease if the price of a complement increases.

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22
Q

Define elasticity

A

A measure of the responsiveness of quantity demanded to a change in a variable which affects it.

23
Q

Define Price Elasticity of Demand (PED)

A

A measure of the responsiveness of quantity demanded of a good/service to a change in its price.

24
Q

What is the formula for PED?

A

% Change in Quantity Demanded
____________________________________

% Change in price

25
Q

Define price elastic in demand

A

When the percentage change in quantity demanded of a good/service is more proportional than the percentage change in price. Consumers are sensitive to a change in price.

26
Q

Define price inelastic in demand

A

When the percentage change in quantity demanded of a good/service is less proportional than the percentage change in price. Consumers aren’t too sensitive to a change in price.

27
Q

Define unitary price elastic in demand

A

When the percentage change in quantity demanded of a good/service leads is exact and opposite to the percentage change in price.

28
Q

Define perfectly price elastic in demand

A

When consumers demand an unlimited quantity of a good/service at a certain price.

29
Q

Define perfectly price inelastic in demand

A

When the quantity demanded of a good/service will not change to an increase/decrease in price.

30
Q

What is the value of PED for a good which in price elastic in demand?

A

Greater than 1 and less than infinity.

31
Q

What is the value of PED for a good which is price inelastic in demand?

A

Less than 1 but greater than 0.5

32
Q

What is the value of PED for a good which in unitary elastic in demand?

A

Exactly 1.

33
Q

What is the value of PED for a good which is perfectly price elastic in demand?

A

Infinity.

34
Q

What is the value of PED for a good which is perfectly price inelastic in demand?

A

0.

35
Q

What is the value of PED always?

A

Negative

36
Q

What are the Determinants of PED?

A

SPLAT

Substitutes (no.)
Percentage of Income
Luxury/Necessity
Addictive/Habit forming
Time period

37
Q

Define Income Elasticity of Demand (YED)

A

A measure of the responsive of quantity demanded to a change in income.

38
Q

What is the formula for YED?

A

% Change in quantity demanded
__________________________________

% Change in Income

39
Q

What is the value of YED if the good is Income elastic in Demand?

A

Greater than +1 and less than -1.

40
Q

What is the value of YED for a good which is Income inelastic in demand

A

Between -1 and +1.

41
Q

Normal goods have what value of YED?

A

Positive.

42
Q

Inferior goods have what value of YED?

A

Negative.

43
Q

Define cross-price elasticity of demand (XED)

A

A measure of the responsiveness of quantity demanded of good/service, to a change in the price of some other good/service.

44
Q

What is the formula for XED?

A

% Change in quantity demanded of good A
__________________________________________

% Change in price of good B

45
Q

What is the good if the XED is positive?

A

Substitute.

46
Q

What is the good if the XED is negative?

A

Complement.

47
Q

If the XED value is between 1 and -1, what type of good is it?

A

Weak substitute/complement.

48
Q

If the XED value is greater than +1 and less than -1, what type of good is it?

A

Strong substitute/complement.

49
Q

Define notional demand

A

The desire to possess something.

50
Q

Define effective demand

A

The desire to possess something, backed up by the ability to pay for it.

51
Q

Define a shift in demand

A

Occurs when anything changed other than price. Cause an increase/decrease in demand.

52
Q

Define a movement in demand

A

Occurs when there is a change in price of a good. Cause an expansion/contraction in demand.

53
Q

What are the determinants of PED?

A

SPLAT
Substitute availability
Proportion of income
Luxury/necessity
Addictiveness
Time period

Economics (8 decks)

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