Economics: Demand, Demand Shifts, and Price Elasticity

Demand

The desire to own something and the ability to pay for it.

Law of Demand

When price increases, quantity demanded decreases; when price decreases, quantity demanded increases.

Inverse Relationship

A relationship in which two things move in opposite directions.

Quantity Demanded (QD)

The amount of a good or service consumers are willing and able to buy at a specific price.

Substitution Effect

When consumers buy a different product because the price of another product increases.

Income Effect

When a change in price affects consumers' purchasing power and the amount they can afford to buy.

Demand Schedule

A table showing the quantity demanded at different prices.

Demand Curve

A graph showing the relationship between price and quantity demanded; it slopes downward.

Movement Along the Demand Curve

A change in quantity demanded caused by a change in the product's own price.

What causes movement along the demand curve?

A change in the price of the good or service.

What causes an increase in quantity demanded?

A decrease in price.

What causes a decrease in quantity demanded?

An increase in price.

What causes a shift in demand?

Changes in income, consumer expectations, population, consumer taste, advertising, and prices of related goods.

Demand Shift

A change in the entire demand curve caused by a non-price factor.

Increase in Demand

A shift of the demand curve to the right, meaning consumers want to buy more at every price.

Decrease in Demand

A shift of the demand curve to the left, meaning consumers want to buy less at every price.

Consumer Expectations

What consumers believe will happen to prices or product availability in the future.

Consumer Taste

Consumers' preferences and interests that influence what they buy.

Price of Related Goods

The price of other products that can affect demand for a particular good.

Elasticity of Demand

A measure of how much consumers react to a change in price.

Inelastic Demand

Demand that does not change much when the price changes.

Elastic Demand

Demand that changes significantly when the price changes.

Factors Affecting Elasticity

Availability of substitutes, relative importance, necessities versus luxuries, and change over time.

Availability of Substitutes

How easily consumers can find another product to replace a good.

Relative Importance

How much of a consumer's budget is spent on a particular good.

Necessities

Products people need and are less likely to stop buying when prices increase.

Luxuries

Products people want but do not necessarily need and may stop buying when prices increase.

Change Over Time

Products may become more elastic over time because consumers have more time to find substitutes.

Total Revenue

The total amount of money a business receives from selling goods or services; price multiplied by quantity sold.