demand Flashcards
(24 cards)
what is demand
the amount consumers are willing and able to purchase at any given price over a period of time
draw a demand curve and describe
inverse relationship between price and quantity
as price falls the quantity demanded rises and as price rises demand decreases
what is effective demand
the willingness and ability of consumers to purchase goods at different prices
what is individual demand
Refers to the demand of an individual consumer for a product
what is market/total demand
market demand is the sum of all individuals consumers demands for a product e.g. total demand
what is the law of demand
the quantity demand willi increase as price falls due to reduced opportunity cost
why is the demand curve downward sloping
- income effect: if prices increase consumers willi be able to buy a small number of goods with the income they have
meaning their real income falls and consumers will react by buying less goods - substitution effect: as the price of goods increase people are likely to switch and purchase from other business instead
- utility: consumers gain satisfaction from consuming goods. marginal utility is the utility gained from consuming one extra unit of a good.
3 types of utility
individual utility: satisfaction derived from the consumption of a good/service
total utility: the entire satisfaction gained from all units consumed
marginal utility: the additional utility derived from the next purchase
what is the law of diminishing returns (4)
this law states that as more of a varible factor of production e.g. labour added to a fixed factor of porduction e.g. land then output initially increases but will eventually fall as staff number becomes too large and the fixed factor if overworked
average total costs fall due to increase average returns and rise due to diminishing average returns
marginal costs fall due to increasing marginal returns and rise due to diminishing maginal returns
this applies in the short run time period when one factor of production is fixed. in the long ru there is no fixed costs
causes of an upward sloping demand curve (5)
Veblen goods: luxury products who do not follow the usual rules of demand. e.g. Rolex
Giffen goods: necessary goods such as bread. demand will remain the same as price increases
Speculative goods: products bought when prices rise as consumers believe their price willi increase further and so they can be sold later on for more profit
quality goods: a high price suggest greater quality meaning more people may purchase
addictive forming goods:
what are the shifts in demand curves called (2)
contractions - decrease in quantity demanded
extensions - increase in the quantity demanded
factors that cause a shift in the demand curve (6)
- population: increased population willi increase demand
- advertising: success of promotions will increase demand
- substitutes: if a price of a sub good increases it should increase demand for the alternative good
- complementary goods: a rise in price for a complementary good should reduce demand for the other e.g. joint demand
- income: if income increase demand increases
- changes in fashion: due to trends
what is price elasticity of demand
it measures the responsiveness of demand to a change in price. this is how much demand will change following a price movement
formula for price elasticity
%change in quantity demanded / %change in price
explain elastic demand
the PED value is greater than 1 and states demand will change is price increases or drops
inelastic demand explained
its PED value is greater than 0 but less than one and suggests that a change in price willi cause little change to demand
factors which determine price elasticity of demand (7)
- the number of substitutes for a good/service: the more substitutes the greater the elasticity as a price change will result in an increase spent on alternative products
- degree of necessity: necessary or addictive items tend to be more price inelastic are are purchased regardless of an increase in price
- luxuries: these tend to be elastic as demand falls when price increases
- habitual and regular consumption goods: tend to be inelastic e.g. bread
- %of income spent: low cost items have price inelasticity e.g. slat
- frequency of purchase: if you can postpone the purchase of a product there is greater elasticity e.g. dishwasher
- time: demand is elastic in the long run rather than short run e.g. increase in electricity price
what happens to total revenue when demand is elastic
a price rise will reduce demand and lead to a fall in revenues
a price fall will lead to greater demand and increase sales revenues
what happens to total revenue when demand is inelastic
a rise in price leads to a small fall in quantity demanded leading to a an increase in total revenue
a fall in price will lead to a smaller increase in quantity demanded leading to fall in revenue
importance of elasticity of demand to firms (5)
- business need to know PED in order to increase or decease their prices to maximise revenue
- it can help business make a marketing plan
- to estimate the effect of change in an indirect tax on price and quantity demanded and whether they can pass the tax to their customers
- PED info can be used for price discrimination
- a firm may plan a promotional discount on price to increase demand
importance of elasticity of demand to governments (2)
- governments must know about PED to determine what to tax and whether to increase or decrease tax to bring in more revenue. gov taxes inelastic goods
- PED knowledge could be useful for assessing effect of price support schemes e.g. minimum pricing for agriculture
what is joint demand
joint demand refers to the demand for 2 or more products which are
what is derived demand
demand for a factor of production which is used to produce another good or service
what is competitive demand
when a number of substitutes exist and one good can be purchased instead of another good
