Topic 2 - Nature Of Demand Flashcards
(24 cards)
Demand
The quantity of a good or service that consumers choose to buy at any possible price in a given period
Effective demand
Desire to possess and the ability to possess a good or service.
Notional demand
The desire to obtain a good or service.
Diminishing marginal utility
The situation where an individual gains less additional utility from consuming a product, the more of it is consumed.
Demand curve
A graph showing the quantity demanded of a good or service by consumers at any given price.
Law of demand
A law that states that there is an inverse relationship between quantity demanded and price.
What are the conditions of demand
Population size
Advertisement
Price of substitute
Income
Fashion/ Taste
Income distribution
Price of complement
Other:
Weather
Normal good
A good where the quantity demanded increases in response to an increase in consumer incomes.
Inferior good
A good where the quantity demanded decreases in response to an increase in consumer incomes.
Substitute good
Two goods are substitutes if they are said to be in ‘competitive demand’ meaning if the price for one good rises the demand for the other good rises.
Complement good
Two goods are said to be complement goods if they are in joint demand, meaning if the price of one good increases then the demand for the other good decreases.
Elasticity of demand
A measure of the sensitivity of QD to a change in a variable which affects it, such as price or income.
Price elasticity of demand
Measures the sensitivity of the QD of a good or service to a change in price.
Equation for PED
%🔼 in QD
—————- = PED
%🔼 in price
Relative price elasticity
A term used when the price elasticity of demand is greater than one, meaning demand is sensitive to a change in price.
Relative price inelasticity
A term used when the price elasticity of demand is less than 1, meaning demand is not very responsive to a change in price.
Unitary price elasticity
A term used when price elasticity of demand is equal to 1, meaning demand and price are constant.
Name the influences on the PED
Substitute availability
Proportion of income
Luxury/ necessity
Addictive
Time
Income elasticity of demand
A measure of the sensitivity of QD to a change in incomes
Equation for YED
YED = %🔼 in QD
—————
%🔼 in Y
Luxury goods
One for which the income elasticity of demand is positive, and greater than 1, such that as incomes rise, consumers spend proportionally more on the good.
Necessity good
A good for which the income elasticity of demand is positive, and less than 1, such that as incomes rise, consumers spend proportionally less on the good
Cross price elasticity
A measure of the sensitivity of QD to a change in the price of another good or service.
