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
