Econ flashcards how markets work - demand

Define demand.

Quantity consumers are willing and able to buy at a given price in a given time period.

State the law of demand.

As price ↑, quantity demanded ↓, ceteris paribus.

What does ceteris paribus mean?

All other things being equal.

What causes a movement along a demand curve?

A change in the good's own price.

What causes a shift in demand?

A change in a non-price determinant.

Main non-price determinants of demand?

Income, tastes/preferences, prices of substitutes/complements, expectations, population and advertising.

Price of a substitute rises — what happens?

Substitute becomes relatively expensive → consumers switch towards the other good → its demand shifts right.

Price of a complement rises — what happens?

Complement becomes more expensive → joint consumption becomes more expensive → demand for the related good ↓ → demand shifts left.

PED formula?

% change in QD ÷ % change in price

What does |PED| > 1 mean?

Demand is price elastic.

What does |PED| < 1 mean?

Demand is price inelastic.

Main determinants of PED?

Number/closeness of substitutes; proportion of income spent; necessity vs luxury; addictiveness; time period.

Why do more substitutes make demand more elastic?

Price ↑ → consumers can easily switch to alternatives → proportionately larger fall in QD → PED more elastic.

Why are necessities generally price inelastic?

Consumers still need them when price rises → QD changes relatively little

Why can demand become more elastic over time?

Consumers have more time to find substitutes/change behaviour.

YED formula?

% change in QD ÷ % change in income

Positive YED means?

Normal good.

Negative YED means?

Inferior good.

XED formula?

% change in QD of A ÷ % change in price of B

Positive XED means?

Goods are substitutes.

Negative XED means?

Goods are complements.