Theory of Market Demand Flashcards
What is the definition for demand?
Demand for a good or service is the quantity that purchasers are willing and able to buy at a given price in a given period of time.
What is the basic law of demand?
Demand varies inversely with price lower prices make products more affordable customers.
What is the link between price and demand?
As price goes up demand goes down
As price goes down demand goes up/
What is the link between income and costs?
Prices falls, income takes you further
What is the income effect?
The income effect is the change in the consumption of goods by consumers based on their income (purchasing power).
What is the substitution effect?
The substitution effect happens when consumers replace cheaper items with more expensive ones due to price changes or when their financial conditions improve, and vice-versa.
Why is the demand curve downward sloping? (income effect)
Fall in price increases real purchasing power
Allows people to buy more with a given budget
For normal goods demand rises with increase in real income.
Why is the demand curve downward sloping (substitution effect)
Fall in price of good X makes it relatively cheaper compared to substitutes.
Some consumers will switch to good X leading to higher demand.
Much depends on whether products are close substitutes.
What does seasonality refer to?
Refers to fluctuations in output and sales related to the seasonal of the year.
What is marginal utility?
The satisfaction from consuming one extra unit.
