Topic 2: Demand and Supply Flashcards
Define demand
Demand refers to the actual buying intentions of the consumers
Define quantity demanded
The quantity that consumers are willing and able to purchase at a particular quantity
- Negative relationship as price rises, quantity demanded falls
Define the law of demand
As the price of a good rises, people buy less of it, ceteris paribus (holding other factors constant)
Define income effect ( slope downwards)
Price of the good rises, consumers aren’t willing to buy much of the good because their real income or purchasing power decreases
Define substitute effect (slope downwards)
Price of one good rises other goods become more attractive to buyers because they are relatively cheaper
What are the effects of a change in price on the quantity demanded
change in price can’t shift the demand curve but leads to movement along the curve
What are the non-price factors affecting demand?
- Demographic Factors
- Levels of disposable income
- Price of related goods- substitutes
- Price of relative goods - Complements
- Taste and preferences
- Expectations of consumers
Explain Demographic factors
The size and age composition of the population
Explain levels of disposable income
Consumer purchase more of a good when their income increases
- Normal goods: One where demand increases as income rises
- Inferior good : A good where demand decreases as income rises (home brand products)
Explain related goods - substitutes
Increase in products/service that satisfy the same wants
Explain related goods - Complements
Goods consumed with the other good (Cars and petrol)
Explain taste and preferences
Increase in products/service from digital age - Insta and uber
- Many consumers prefer more environmentally friendly and organic products
Explain the expectations of consumers
If people expect condition to change in the future , they may make decisions to postpone or do it quicker.
Define supply
Supply is the amount of goods and services that producers are willing and able to sell at a particular price and at a particular point in time
Define the law of supply
The law of supply states that as the price of goods and services rises the quantity supplied will also rise
