THEME 1 - Topic 2 - The Nature of Demand Flashcards
What do consumers aim to do?
Maximise utility.
What do producers aim to do?
Maximise profits.
What does marginal cost equal?
Marginal revenue.
Define Notional demand
The desire to possess something.
Define Effective demand
The desire to possess something, backed up by the ability to purchase it.
Define demand
The quantity of a good/service that consumers choose to buy at any possible price in a given period.
Why is the demand curve downward sloping?
Due to the law of Diminishing Marginal Utility.
Define the law of Diminishing Marginal Utility
The situation where individuals gain less additional utility from a consuming a product, the more it is consumed.
Define the Demand curve
A graph showing the quantity demanded of a good/service at any given price.
What causes a movement along the Demand curve?
A change in price.
What does a movement up the Demand curve cause?
A contraction in demand.
A decrease in quantity demanded.
What does a movement down the Demand curve cause?
An extension in demand.
An increase in quantity demanded.
Define the Law of Demand
States that there is an inverse relationship between price and quantity demanded of a good/service following ceteris paribus.
What causes a shift in the Demand curve?
A change in anything other than price.
What does a shift left of the Demand curve cause?
A decrease in demand.
What does a shift right of the demand curve cause?
An increase in demand.
What are the Determinants of Demand?
PASIFIC
Population
Advertising
Substitute’s price
Income
Fashion/Taste
Interest rates/Legislation
Complement’s price
Define a normal good
Is when the quantity demanded increases in response to an increase in consumer incomes.
Define an inferior good
Is when the quantity demanded decreases in response to an increase in consumers goods.
Define a substitute
2 goods that are in competitive demand. Demand will increase if the price of a substitute increases.
Define a complement
2 good that are in joint demand. Demand will decrease if the price of a complement increases.
Define elasticity
A measure of the responsiveness of quantity demanded to a change in a variable which affects it.
Define Price Elasticity of Demand (PED)
A measure of the responsiveness of quantity demanded of a good/service to a change in its price.
What is the formula for PED?
% Change in Quantity Demanded
____________________________________
% Change in price
Define price elastic in demand
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.
Define price inelastic in demand
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.
Define unitary price elastic in demand
When the percentage change in quantity demanded of a good/service leads is exact and opposite to the percentage change in price.
Define perfectly price elastic in demand
When consumers demand an unlimited quantity of a good/service at a certain price.
Define perfectly price inelastic in demand
When the quantity demanded of a good/service will not change to an increase/decrease in price.
What is the value of PED for a good which in price elastic in demand?
Greater than 1 and less than infinity.
What is the value of PED for a good which is price inelastic in demand?
Less than 1 but greater than 0.5
What is the value of PED for a good which in unitary elastic in demand?
Exactly 1.
What is the value of PED for a good which is perfectly price elastic in demand?
Infinity.
What is the value of PED for a good which is perfectly price inelastic in demand?
0.
What is the value of PED always?
Negative
What are the Determinants of PED?
SPLAT
Substitutes (no.)
Percentage of Income
Luxury/Necessity
Addictive/Habit forming
Time period
Define Income Elasticity of Demand (YED)
A measure of the responsive of quantity demanded to a change in income.
What is the formula for YED?
% Change in quantity demanded
__________________________________
% Change in Income
What is the value of YED if the good is Income elastic in Demand?
Greater than +1 and less than -1.
What is the value of YED for a good which is Income inelastic in demand
Between -1 and +1.
Normal goods have what value of YED?
Positive.
Inferior goods have what value of YED?
Negative.
Define cross-price elasticity of demand (XED)
A measure of the responsiveness of quantity demanded of good/service, to a change in the price of some other good/service.
What is the formula for XED?
% Change in quantity demanded of good A
__________________________________________
% Change in price of good B
What is the good if the XED is positive?
Substitute.
What is the good if the XED is negative?
Complement.
If the XED value is between 1 and -1, what type of good is it?
Weak substitute/complement.
If the XED value is greater than +1 and less than -1, what type of good is it?
Strong substitute/complement.
Define notional demand
The desire to possess something.
Define effective demand
The desire to possess something, backed up by the ability to pay for it.
Define a shift in demand
Occurs when anything changed other than price. Cause an increase/decrease in demand.
Define a movement in demand
Occurs when there is a change in price of a good. Cause an expansion/contraction in demand.
What are the determinants of PED?
SPLAT
Substitute availability
Proportion of income
Luxury/necessity
Addictiveness
Time period
