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Flashcards in Ch. 4 Demand Deck (30)
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What is the economic theory?

Collection of models of simplified representations of economic reality to help understand a variety of economic issues.


Ceteris Paribus means...

All other thing equal
-set aside other relevant factors as unchanged



The desire, ability, and willingness to buy a product


Demand Schedule

Table that shows the quantities of a good/service that a person will purchase at each price.


Demand Curve

A graph of a demand schedule


Law of Demand

As price falls, quantity demanded rises. As price rises, quantity demanded falls. Inverse relation.
Exception: Luxury and skin care due to social value and quality


What are the 3 behavior patterns of consumers that results in the law of demand?

1) Income Effect
2) Substitution Effect
3) Diminishing Marginal Utility


Income Effect

A change in price alters consumer's purchasing power. As the price falls, buyers can afford more thus quantity increases.


Substitution Effect

Consumers react to a good's price by switching to a similar product if the price is too high.


Diminishing Marginal Utility

The more we consume of something, the less satisfaction we get from it. Only buy extra if price falls accordingly.


Change in Demand

The entire demand curve shifts thus creating a new demand curve. A shift to the right means increase in demand; a shift to the left shows a decrease in demand.


Determinants of Demand

Non-price conditions that influence a consumer's willingness and ability to demand a good.


What are the determinants of demand?

Preference and Taste
Related Goods
Consumers (# of buyers)
Expectation of Buyers


What is preference and taste?

It is how we view products. It can relate to trends, ads, news, and other social media.


What is related goods?

Complementary products (the use of one increases the use of the other)


What is income (in terms of a determinant)?

Income of consumers changes the demand but depends on type of goods.
- Normal Goods: Income goes up, demand goes up (luxuries)
- Inferior Goods: Income goes up, demand goes down (Top ramen, used cars)


What is consumers (in terms of a determinant)?

The population and target demographics.


What is the expectation of buyers?

Future prices, shortages, surpluses, and new technology.


What are substitutes?

When the price of one item changes, consumers will switch to a similar but cheaper good. (No difference)


Change in Quantity Demanded

More or less units of a good is demanded because the price changes (Law of Demand)


Change in Demand

The demand curve has shifted indicating an increase/decrease at all price levels (Determinants of Demand)


Price Elasticity of Demand

How responsive demand is to a change in price


Elastic Demand

A change in price cause of a change in quantity demanded (very responsive, gradual slope)


Inelastic Demand

A change in price has a very small effect on a quantity demanded (not responsive, steep slope)


What does a perfectly inelastic demand look like?

A vertical line. These are live or die goods.


What factors affect the elasticity of demand?

1) Necessity verus luxury. If needed, good is inelastic.
2) If substitutes available, then elastic. If few substitutes then inelastic.
3) Is there time for consumers to adjust to price changes? Inelastic for short time.
4) Does the purchase use a large portion of one's income? Income effect used here. Price usually affects poor more than wealthy.


How do you calculate elasticity?

% change of quantity / % change of price
original - new / original x 100
- E > 1 = elastic
- E = 1 = unit elastic
- E < 1 = inelastic


What is unit elastic?

Quantity demanded changes by the same % as price does.


Why does elasticity matter?

A firm's total revenue is related to the price elasticity of demand.
- elastic = sell more at lower price
- inelastic = make money by sell at higher price even if quantity demanded falls


What is the total revenue test?

TR = P x QD
- P & R move in same direction -> inelastic
- P & R move in opposite direction -> elastic