Demand and Supply Flashcards
(25 cards)
What is Demand?
The willingness and ability of an individual or group to buy a specific quantity of a good or service at a given price.
What is Quantity Demanded?
A specific amount of a good or service that an individual or group is willing and able to purchase at a particular price point.
What is Individual Demand?
The demand for a good or service by a single person.
What is Market Demand?
The total demand for a good or service by all individuals in a specific market or group.
What is the Law of Demand?
The principle that an increase in price leads to a decrease in quantity demanded, and vice versa, ceteris paribus (all else equal).
What are Determinants of Demand?
Factors that influence demand, including the price of the good, income, wealth, prices of substitute and complementary goods, and expectations.
What is the Income Effect?
The impact of a price change on a consumer’s purchasing power, leading to a change in quantity demanded due to a change in the consumer’s ability to afford a good.
What is the Substitution Effect?
The impact of a price change on the consumer’s relative preferences, leading to a shift to buying relatively cheaper goods instead of relatively more expensive goods.
What are Substitute Goods?
Goods that can be used in place of one another. An increase in the price of one typically increases the demand for the other.
What are Complementary Goods?
Goods that are often consumed together. An increase in the price of one usually decreases the demand for the other.
What is Wealth?
The net value of an individual’s assets at a given point in time.
What is Income?
The earnings received from wages, salaries, or investments over a period of time.
How is ‘demand’ defined in economics, and what two elements does it encompass?
Demand is defined as the willingness and ability of an individual or group to buy a specific quantity of a good or service at a given price. It encompasses both the desire to purchase and the economic means to do so.
What is the crucial difference between ‘demand’ and ‘quantity demanded’?
‘Demand’ reflects the complete behavior (willingness and ability) at various price levels, often represented as a curve or equation, while ‘quantity demanded’ refers to a single quantity purchased at a specific price point on that curve.
Explain how market demand is derived from individual demands.
Market demand is derived by aggregating the individual quantities demanded by all individuals in a specific market (e.g., a city, country) at each price point. This means adding up the individual demand for each price level.
Describe the Law of Demand in terms of the relationship between price and quantity demanded.
The Law of Demand states that there is an inverse relationship between price and quantity demanded. As the price of a good increases, the quantity demanded decreases, and vice versa, assuming all other factors remain constant.
How does consumer income typically influence the demand for most goods, and why?
Typically, an increase in consumer income leads to an increase in the demand for most goods, as people have more disposable income to spend. This relationship is generally considered positive.
Explain how consumer wealth affects demand, using an example of the 2007/2008 Great Recession.
Consumer wealth affects demand similarly to income. When wealth increases, consumers tend to spend more, increasing demand. In 2007/2008, rising house prices increased homeowner wealth, which led to more spending. A decline in house prices reversed this effect.
What are substitute goods, and how does a change in the price of a substitute affect the demand for the original good?
Substitute goods are those that can be used in place of one another. If the price of a substitute good increases, the demand for the original good will likely increase, as some consumers switch to the relatively cheaper original good.
Provide an example of complementary goods and describe the effect on the demand for one good when the price of its complement changes.
Hotel rooms and flights to Hawaii are complements. If the price of flights increases, demand for hotel rooms will likely decrease, because fewer people will travel there, thus reducing the need for rooms.
What is meant by the ‘substitution effect’ in relation to price changes and demand?
The substitution effect describes how consumers will switch from consuming more expensive goods to consuming cheaper substitutes, leading to a decrease in demand for the more expensive good and an increase in demand for the substitute.
What is meant by the ‘income effect’ in relation to price changes and demand?
The income effect explains how the change in price impacts a consumer’s buying power. When a price goes up, they have less purchasing power, resulting in a decreased ability to purchase the good.
Which of the following characteristics is a fundamental similarity that nearly all demand curves share?
- They are curved.
- They slope upward from left to right.
- They slope downward from left to right.
- They are straight lines.
They sloped downward from left to right
Demand curves will appear somewhat different for each product. They may appear relatively steep or flat, or they may be straight or curved. Nearly all demand curves share the fundamental similarity that they slope down from left to right. This is because the Law of Demand states that as the price of a product decreases, consumers want to purchase more of it.
