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23 Cards in this Set
- Front
- Back
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Demand |
The quantity of a good or service that consumers choose to buy at any possible price in a given period. |
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Diminishing marginal utility |
describes the situation where an individual gains less additional utility from consuming a product, the more of it is consumed |
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Reason for the real income effect? |
1) Price increase = real income decrease = buy less 1) Price decrease = real income increase = buy more |
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Reason for the substitution effect? |
1) Price increase = people substitute away from more expensive good e.g. normal/luxury towards inferior goods 2) Price decrease = people substitute towards more expensive goods |
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Relationship between price and quantity demanded? |
Left to right downward sloping demand curve |
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Perverse demand curve causes |
1) Good ostentation - good bought for status - high price = high status 2) Speculative - buying something at a lower price and storing it for when the price increases so it can be sold back at a higher price e.g. precious metals/shares 3) Giffen good |
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Giffen good |
occurs when a rise in price causes higher demand because the income effect outweighs the substitution effect. Suppose you have a very low income and eat two basic food stuffs rice and meat. Meat is a luxury and is much more expensive than rice
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6 Determinants of demand |
1. Income 2. Tastes and preferences + advertising 3. Price of related goods 4. Population and age structure 5. Expectations of future prices 6. Credit availability |
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1. Income |
Income increase: - normal good = demand increase - inferior good = demand decrease Income decrease: - normal good = demand decrease - inferior good = demand increase |
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2. Tastes and preferences |
- tastes in favour = demand increase e.g. electric cars/healthy popcorn - tastes against = demand decrease e.g. landline phones/sat navs |
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Reasons for advertising |
firms want to prevent demand from falling and a successful campaign is aiming to change customer's tastes and preferences to shift the demand curve to the right
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3. Price of related goods |
Compliments e.g. shampoo and conditioner & substitutes e.g. margarine and butter |
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4. Population and age structure |
- Populating increase = demand for all good rises - Population decrease = demand for all good falls (consider ageing population) |
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5. Expectations of future prices |
- only relevant in the short term - predicted increase in price = demand will increase - predicted fall in price = demand will decrease - e.g. houses |
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6. Credit availability |
Credit = money you don't own so is borrowed to finance spending - loan/overdraft/credit cards - longer borrowing = higher credit score Low interest rates = more availability = boost in demand |
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Elasticity |
a measure of the sensitivity of one variable to changes in another variable |
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PED |
- a measure of the sensitivity of quantity demanded to a change in the price of a good or service - % change in qd / % change in price |
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PED values |
0 = perfectly inelastic 1 = unitary infinity = perfectly elastic |
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Determinants of PED |
1) Availability and quality of substitutes 2) Brand loyalty 3) Necessity vs luxury 4) Proportion of income 5) Short run vs long run 6) Habit forming 7) Market demand vs demand for a firm's product (e.g. general demand for bread is inelastic but there are substitutes for Hovis) |
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YED |
- a measure of the sensitivity of quantity demanded to a change in consumer income
- % change in qd / % change in y |
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YED values |
minus infinity = inferior income elastic minus 1 = inferior income elastic 0 = perfectly income elastic 0 - 1 = relatively income elastic 1 = unitary infinity = relatively income elastic |
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CPED (XED) |
- the sensitivity and responsiveness of quantity demanded of good A to a change in the price of good B - % change of good A / % change of good B |
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CPED values |
minus infinity to - 1 = good compliment -1 to 0 = bad compliment 0 = unrelated goods 0 to 1 = poor substitutes 1 to infinity = good substitutes |
