Demand and the Demand Curve Flashcards
(22 cards)
What is the definition of demand in economics?
The quantity of a good or service that consumers are willing and able to buy at a given price in a given time period.
What is effective demand?
Demand backed by the ability to pay — consumers must be both willing and able to purchase.
What is the law of demand?
There is an inverse relationship between price and quantity demanded: as price rises, demand falls and vice versa (assuming ceteris paribus).
What does a demand curve look like?
A downward sloping line from left to right, showing that lower prices lead to higher quantities demanded.
What causes a contraction of demand?
An increase in price leads to a movement up the demand curve (less is demanded).
What causes an extension of demand?
A decrease in price leads to a movement down the demand curve (more is demanded).
What are the two main reasons for the downward slope of the demand curve?
Income Effect – A higher price reduces real income, so people buy less.
Substitution Effect – A higher price encourages consumers to switch to cheaper alternatives.
What causes a movement along the demand curve?
A change in price (extension or contraction of demand).
What causes a shift in the demand curve?
A non-price factor — demand increases or decreases at all price levels.
What happens when demand increases due to a non-price factor?
The demand curve shifts right (more is demanded at the same price).
What happens when demand decreases due to a non-price factor?
The demand curve shifts left (less is demanded at the same price).
What does the acronym PASIFIC stand for?
P – Population
A – Advertising
S – Substitutes (price of)
I – Income
F – Fashion/Trends
I – Interest Rates
C – Complements (price of)
Flashcard 6
How does an increase in the price of a substitute affect demand?
Increases demand for the original good (shift right).
How does an increase in the price of a complement affect demand?
Decreases demand for the original good (shift left).
What are the income and substitution effects that explain the law of demand?
Income Effect: Higher prices reduce purchasing power, lowering quantity demanded.
Substitution Effect: Consumers switch to alternatives as price rises.
How does Population affect demand?
More people → More demand
Fewer people → Less demand
How does Advertising affect demand?
Effective advertising → Increases demand
Negative/publicity/less advertising → Decreases demand
How does the price of substitutes affect demand?
If the price of a substitute (e.g., Pepsi) increases → demand for the original (e.g., Coke) increases
If the price of a substitute falls → demand for the original decreases
How does income affect demand for different types of goods?
Normal goods: Income ↑ → Demand ↑ (e.g., holidays, branded clothes)
Inferior goods: Income ↑ → Demand ↓ (e.g., value food, public transport)
How does fashion/tastes affect demand?
Trends shift → More demand for fashionable goods
Outdated trends → Demand falls
How do interest rates affect demand?
Interest rates ↓ → Cheaper to borrow → Demand ↑ (for things like houses, cars)
Interest rates ↑ → More expensive to borrow → Demand ↓
How does the price of complements affect demand?
If the price of a complement (e.g., printers) ↑ → demand for related good (e.g., ink) ↓
If complement becomes cheaper → demand for the related good ↑
