Demand Flashcards
What is the definition of demand?
The quantity of a good or service that consumers are willing to purchase at a given price over a given time period.
What happens to the demand curve when we increase or decrease the price?
When we increase the price this causes a contraction of demand. When we decrease the price this causes an extension of demand.
Why the downward slope of the demand curve?
The income effect- rise in price, consumers will suffer a fall in their real incomes. The fall in real incomes will lead to a fall in the quantity demanded
The substitution effect- when there is a rise in price, the consumer tends to buy more of a relatively lower priced good and less of a higher priced one.
What causes a shift in the demand curve?
PASIFIC
Population- increase in size of pop, leads to increased demand for most goods and services
Advertising- successful advertising campaign leads to increase in demand.
Substitutes- decrease in price of substitute leads to decreased demand for good or service.
Incomes- increase in real incomes. Results in increased demand for most goods and services. Results in rightward shift in demand curve.
Fashions/ tastes- decrease in the popularity of a good or service causes a leftward shift in demand curve.
Interest rates- if there is a rise in interest rates it increases the cost of borrowing money so it causes a decrease in demand for certain goods.
Complement goods- for example, printer and printer ink. If the price of printers goes up the demand for printer ink will also go down
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What is the definition for price elasticity of demand?
PED measures the responsiveness of quantity demanded given a change in price.
What are the factors of price elasticity of demand?
SPLAT
Substitutes- more substitutes available strong incentive to shift consumption to them when price of the product rises. This means the existsence of substitutes tends to make demand for the product elastic.
Proportion of income spent- if small percentage of income is spent on a product such as salt then demand tends to be inelastic, otherwise elastic.
Luxury/ necessity- luxury more elastic, necessity more inelastic
Addictive- if product is addictive then demand tends to be inelastic
Time- demand is price elastic in long run as it allows for more time to find substitutes meaning its price inelastic in short run
