topic 2 - theme 1 Flashcards
the nature of demand
what is demand?
the quantity of a good or service that consumers are willing and able to buy at different prices in a given time period
what diminishing marginal utility?
where an individual gains less additional utility from consuming a product as more of it is consumed
what will an increase in price of a given good do to the demand curve?
it will cause a movement along the demand curve and a fall in quantity
what are the determinants of demand?
- population
-advertising
-substitutes
-income (disposable) - fashion and tastes
- income tax and interest rates
- complements
what happens if income tax decreases?
disposable income increases and households will consume/save for more goods + services
what happens if interest rates go down?
cost of borrowing decreases and an increase in demand for loanable funds and households consume more goods and services e.g. white goods
what are veblen goods?
rolex watches, sports cars
what is a normal good?
where the quantity demanded increases in response to an increase in consumer incomes
what is an inferior good?
where the quantity demanded decreases in response to an increase i consumer incomes
what is a complement?
where an increase in the price of one good causes the demand to fall for a related good
what is a substitute?
where an increase in the price of one good causes the demand to increase for a rival product
what is the price elasticity of demand (PED)?
measures the sensitivity if quantity demanded to a change in the price of a good or service
how to calculate PED?
% change in quantity demanded/ % change in price
what does elastic mean?
households are responsive to a change in price
what does inelastic mean?
households are unresponsive to a change in price
what are the numerical values of PED?
0-1 = inelastic
>1 = elastic
=1 = unit elastic
infinity = perfectly elastic
what determines PED?
- number and strength of substitutes
- necessity of consumption
- addictive properties
- time the consumer has to make a purchase
- habitual consumption
- percentage of consumers total income spent on goods or services
what are the rules for elastic demand?
- increase in price = decrease in total revenue
- decreases in price = increase in total revenue
what are the rules for inelastic demand?
- increase in price = an increase in total revenue
- decrease in price = a decrease in total revenue
what is income elasticity of demand (YED)?
measures the sensitivity of quantity demanded to change in consumer incomes
how to calculate YED?
% change in quantity demanded/ % change in income
what income elasticity of demand do inferior goods have?
negative - demand falls as income rises
what income elasticity of demand do normal goods have?
positive - as consumers’ income rises, more is demanded at each price level
what income elasticity of demand do necessities have?
low but positive - between 0 and +1
what income elasticity of demand do luxuries have?
> +1 - quantity demanded rises more than the proportionate to a change in income
how to calculate XED?
% change in quantity demanded of good A/ % change in price of good B
what is the cross price elasticity of substitutes?
positive
weak substitutes - low and positive CPED
close substitutes - high and positive CPED
what is the cross price elasticity of complements?
negative
weak complements - low and negative CPED
close complements - high and negative CPED
