2.2 Demand and PED

What is demand

The willingness and ability to purchase a good or service at the given price in a given period of time

What is the law of demand

For most products the quantity demanded varies inversely with its price

I.e. as the price rises, the quantity will fall

How does the law of demand work?

as price of good or service falls, consumers have more money left over and are more able to afford the product, so more likely to buy it

Draw an ordinary demand curve

Define individual and market demand

Individual demand: The demand for a good or service by an individual consumer

Market demand: the total demand for a good or service

What are shifts of the demand curve

A complete movement of the existing demand curve either outward (to the right) or inward (to the left).

All shifts are caused by non-price factors and occur when the quantity of a good demanded changes even though the price remains the same.

What are movements along the demand curve?

When the price changes, leading to a movement up(contraction-quantity decreases) or down(extension-quantity increases) the existing curve

Give examples of why the demand curve may shift

• income

• Marketing

• Tastes and fashion

• Substitutes

• Population

• Economic situation

• Government policies

What are the changes in demand and their effect

What is PED

Price elasticity of demand - the responsiveness of quantity demanded to a change in the price of the product

What is inelastic demand

When the percentage change in quantity demanded is less than the percentage change in price

What is elastic demand

When the percentage change in quantity demanded is greater than the percentage change in price

Using PED how do you know if its elastic or inelastic demand

If value of PED is less than 1 then its price elastic (0-1)

If value of PED is more than 1 then its price elastic (1-infinity)

*PED IS NEGATIVE, economists just ignore the sign, so it should be -1

What are all five PED’s

What are the graphs for all the PED’s

What is the PED formula

PED = %change in quantity demanded

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%change in price

What are the effects of PED on both consumers and producers?

Consumers: allows consumers to plan their expenditure depending on the PES, if inelastic for example, producers know they can charge more to the consumers.

Producers: they can use PED to increase their total revenue, if elastic PES, producers know to decrease their prices.

What is unitary demand

When the percentage change in quantity is the same as the percentage change in price