Flashcards in Micreoeconomics, Part 2- Price Determination in a Competitive Market Deck (60)
The amount that consumers are willing and able to buy at each given price.
What does the demand curve look like?
-y axis = P
-x axis = Q
-Straight line between the ends of the axes, negative correlation. Line labelled D
-Origin = O
Law of diminishing marginal return / utility definition:
As we buy more of one item, the benefit we receive falls, therefore we will only buy more when the price falls.
Extension in demand definition:
Increases in quantity demanded caused by falls in price.
What does an extension in demand look like on the demand curve?
Contraction in demand definition:
Decrease in quantity demanded caused by rising prices.
What does a contraction in demand look like on the demand curve?
What does an increase in demand look like on the demand curve?
-A line where lower P and Q meet
-A line where higher P and Q1 meet.
Why does an increase in demand look the way it does on the demand curve?
Because at the same price, the demand has increased from Q to Q1.
What are the reasons that demand increases?
-Price of substitutes
-Increase in population
-Changes in income
-Advertising and publicity
-Prices of complementary products
-Changes in quality
-Uncertainty over future prices
-Consumer tastes and preferences
Inferior good definition:
Goods or services that will see demand fall when income rises.
Normal good definition:
Goods or services that will see an increase in demand when income rises.
Replacement for another product.
Composite demand definition:
A good that is demanded for more than one purpose so that an increase in demand for one purpose reduces the supply for the other. e.g. milk and butter- Farmer Stone
Derived demand definition:
When the demand for one good or service comes from the demand for another good or service. One has to be a component of the other e.g. an increase in the demand for phones increases the demand for precious metals.
Complementary good definition:
Goods that are consumed together.
Price elasticity of demand definition:
Measures the responsiveness of the quantity demanded to a change in the price of the good.
Formula for PeD:
% change in quantity demanded / % change in price
If the PeD is above 1, what type of elastic demand does the good have?
If the PeD is between 0 and 1, what type of elastic demand does the good have?
In an elastically demanded good, how does quantity demanded compare with the price cut?
The quantity demanded rises by proportionately more than the price cut.
In an inelastically demanded good, how does quantity demanded compare with the price cut?
The quantity demanded rises by proportionately less than the price cut.
In an elastically demanded good, what happens to revenue when price falls?
In an elastically demanded good, what happens to revenue when price rises?
What does the diagram of a perfectly elastic good look like?
The demand curve is horizontal.
What does the diagram of a perfectly inelastic good look like?
The demand curve is vertical.
What is the PeD of a perfectly elastic good?
What is the PeD of a perfectly inelastic good?
What does the demand curve of a good with a PeD of 1 look like?
A curve that never touches either axes