Economics Chapter 4: Demand

Demand determinants

1)consumer tastes 2)consumers expectations 3)consumers income 4)porportion of income 5)prices of related goods 6)sustitutability /)number of buyers

Why is there an inverse relationship between price and quantity demanded?

1)law of diminighsin marginal utility 2)income effect 3)substitution effect

Characteristics of Elastic

1)luxury goods (cars) 2) large percentage of income (house) 3) many substitutes available 4)can postpone purchase

Characteristics of Inelastic

1)need (medicine, needs, gasoline, clothing) 2)makes up a relatively small percent of your income (salt, pencils, newspaper) 3) no easy subtitutes available (insulin) 4)cannot postpone purchase of that good

Law of demand

states that there is an inverse relationship between the price and the quantity demanded of a good or service. Ex: If the price falls, the quantity demanded rises If the price rises, the quantity demanded falls.

Mid-point formula

ED= Change in Quantity(subract the difference)/(Q1+Q2)/2/ Change in Price/(P1+P2)/2

How do you know its elastic, inelastic or unit?

ED>1 : Elastic ED<1: Inelastic ED=1: Unit

Total revenue test

Total revenue = price * quantity Multiply price and quantity to get total revenue

Normal vs Inferior goods

When the income increases the demand increases aswell. When the income decreases the demand in normal goods decreases too. When the income increases the demand decreases, and when then income decreases the demand increases.

Prices of related goods

a change in the price of a related good may either increase or decrease the demand for a product, dependending on whether the related good is a substitute or a complement. ***substitute good and complementary good

Consumers tastes

a favorable change in consumer tastes for a good increases the demand for the good. If consumers no long desire certain goods, then the demand decreases for that good. (Doesn´t focus on price, always on preference)

Number of buyers

an increase in the number of buyers for a certain good will cause the demand for the good to increase. A decrease in the number of buyers will cause the demand to decrease. (population)

Inferior goods

are goods that consumers demand less of when their incomes rises. ex: used clothing, used cars, generic medicine

Normal goods

are goods that consumers demand more of when their income rises. ex: sports tickets, jewelry, electronic equipment, restaurant meals

What causes change in Quantity demanded?

change in price of a good.

Consumer expectations

consumer price expectations for the future can affect spending patterns today. If consumers think the price of a good will increase in the future, they buy more today. If they think the price will decrease in the future, they buy less today.

Substitution effect

consumers substitute cheaper goods and services when prices increase

Change in quantity demanded

is a change in the amount of a product that consumers will buy because of a change in priceof a product. ***movement in one point to another ***a change in quantity demanded is shown by a new point on the demand curve

Demand Schedule

is a table that shows how much of a good or service an individual consumer is willing and able to purchase at each price in a market

Substitute good

is one that can be used in place of another good.

Complementary good

is one that is used together with another good.

Demand

is the willingness and ability to buy a good or a service

Elasticity of demand

is used to explain how responsive consumers are to price changes of goods and services.

Change in demand

occurs when something (other than a change in the price) causes consumers to buy different amounts of a good. *** if demand increases, then the demand curve shifts right ***if demand decreases, then the demand curve shifts left

Market Demand Schedule

shows how much of a good or service all consumers are willing and able to buy at each price in the market.

Law of diminishing marginal utility

the benefit from using each additional unit of a good during a given time period declines as consumption increases.

Income effect

the change in the amount of goods and services that consumers will buy because the purchasing power of their income changes

Proportion of Income

the higher the price of good relative to consumer´s incomes, the greater the elasticity of demand.

Substitutability

the larger the number of substitute goods available, the greater the elasticity of demand.

Inelastic

this means that a relatively large change in price causes a relatively small change in quantity demanded.

Elastic

this means that a relatively small change in price causes a relatively large change in quantity demanded.

Unit Elastic

this means that a specific percentage change in price will create the exact same percentage change in quantity demanded.

Mid point formula

to calculate demand elasticity for the product

Total revenue test

to calculate demand elasticity for the product

Consumer income

when consumer income changes, individuals ability to buy goods also changes. Normal goods and inferior goods