U1 AOS 2 - Lesson 2 - Law of Demand and Demand Curve Flashcards
(29 cards)
What does the law of demand state?
The law of demand states that, all else being equal, as the price of a good decreases, the quantity demanded increases, and vice versa.
True or False: The law of demand implies that higher prices lead to higher quantities demanded.
False
The law of demand is represented graphically by a __________ sloping demand curve.
downward
What is a ‘demand schedule’?
A demand schedule is a table that shows the quantity of a good that consumers are willing to purchase at various prices.
What does a demand curve represent?
A demand curve represents the relationship between the price of a good and the quantity demanded by consumers.
True or False:
A downward-sloping demand curve indicates that as the price increases, the quantity demanded also increases.
False
The law of demand states that, all else being equal, an increase in price will lead to a _____ in quantity demanded.
decrease
What is the income effect?
Change in consumption of goods and services resulting from a change in a consumer’s real income or purchasing power.
True or False:
The substitution effect occurs when a price change makes a good more or less attractive compared to its substitutes.
True
The income and substitution effects together explain the overall change in __________ when the price of a good changes.
demand
Which of the following best describes the substitution effect?
A) Change in consumption due to income changes
B) Change in consumption due to price changes of related goods
C) Change in consumption due to tastes and preferences
B) Change in consumption due to price changes of related goods
A utility maximising consumer will aim to purchase a good/service at the ____ price
Lowest
An increase in the price of Good A resulting in an increase in the price of Good B is an example of what?
A. Income effect
B. Substitution effect
C. Change in price of a substitute
D. Change in price of a complement
C
Increase in price of good A → consumers switch their consumption to good B → increase demand of good B → increase price of good B
Since good A and good B are interchangeable, they are substitutes
John historically always buys 3 bags of fruity chew lollies each week. However, due to an increase in the price of sugar, the price of a bag of fruity chews has increased from $3 to $3.50. As a result, John now only buys 2 bags of fruity chews each week.
This is an example of which effect?
Income effect
Jenny used to buy a tin of hot chocolate every month during winter. However, cocoa shortages have increased the price of cocoa, leading to higher prices of hot chocolate. As a result, Jenny now buys tins of Milo.
This is an example of which effect?
Substitution effect
Substitute Goods
Similar goods that can be exchanged for one another
Complementary Goods
Goods that are often consumed together or are reliant upon one another
Income Effect of a Good/Service that has Increased in Price
Increase in price → decreased consumer purchasing power → decreased consumption
Income Effect of a Good/Service that has Decreased in Price
Decrease in price → increased consumer purchasing power → increased consumption
Substitution Effect
Increased price of good/service → higher trade off → decreased consumption
Higher trade off as consumers have to give up more of another good/service to continue to buy the same amount of the original good/service
Chris used to buy dips as an afternoon snack. However, the price of dips has increased. As a result, he has switched to buying more cheese.
This is an example of which effect?
Substitution effect
Why does an increase in price cause the quantity demanded to reduce?
Consumers are limited by budget constraints - a higher price means that less consumers are able to afford the good/service.
Consumers also aim to maximise their utility through their consumption of goods and services. A higher price may no longer maximise the consumers’ utility due to the higher trade off.
Why does a decrease in price cause the quantity demanded to increase?
Consumers are less restricted by budget constraints - a lower price means that more consumers are able to afford the good/service.
Consumers also aim to maximise their utility through their consumption of goods and services. A lower price may now maximise the consumers’ utility due to the lower trade off.
What effect does a decrease in demand have on equilibrium price and quantity?
It typically leads to a lower equilibrium price and a lower equilibrium quantity.
