Demand and Elasticity Concepts

These flashcards cover key vocabulary and concepts related to demand and elasticity, including definitions and principles that are essential for understanding economic behavior.

Law of Demand

As the price of a good decreases, the quantity demanded typically increases.

Example: If the price of a pizza slice drops from 5.00 to 2.00, the quantity of slices you want to buy will increase.

Income Effect

Changes in price affect people's purchasing power; when prices fall, consumers can buy more with the same income.

Example: If you have 20.00 for lunch and pizza prices drop from 5.00 to 2.00, your purchasing power has increased, allowing you to buy more than before.

Substitution Effect

When the price of a good rises, consumers will buy less of that good and more of a cheaper substitute.

Example: If the price of a pizza slice rises to 10.00, you might choose to buy a burger instead because it is the cheaper alternative.

Elastic Demand

Condition when the quantity demanded changes significantly due to price changes; elasticity greater than 1.

Example: If a small increase in pizza price leads almost everyone to stop buying it and eat elsewhere, the demand is elastic.

Inelastic Demand

Condition when the quantity demanded changes little with price changes; elasticity less than 1.

Example: If the price of a life-saving medicine rises by 500\%, people will still buy it because they have no choice, making the demand inelastic.

Ceteris Paribus

Assumption that all other factors remain constant when analyzing the effect of price on demand.

Example: When observing how pizza price affects demand, we assume the quality of the pizza and the price of burgers stay exactly the same.

Normal Goods

Goods whose demand increases when consumer income rises.

Example: As your salary increases, you might stop buying frozen pizza and start ordering more expensive gourmet pizza.

Inferior Goods

Goods whose demand decreases when consumer income rises.

Example: As your income goes up, you might buy less "budget-brand" frozen pizza because you can now afford better options.

Market Demand Schedule

A table that shows the amount of a product demanded at various prices by all consumers.

Example: A chart showing that at a price of 2.00, the whole neighborhood wants 500 pizzas, but at 10.00, they only want 50 pizzas.

Diminishing Marginal Utility

As a person consumes more units of a good, the additional satisfaction from each unit tends to decrease.

Example: The first slice of pizza tastes amazing when you are hungry; however, the fourth slice provides much less extra satisfaction because you are getting full.

Total Revenue

The total income a business receives from selling goods, calculated as price multiplied by quantity sold.

Example: If a shop sells 100 pizzas at a price of 10.00 each, the total revenue is 1,000.00 (10.00 \times 100).

Complements

Goods that are often used together; an increase in demand for one leads to an increase in demand for the other.

Example: Pizza and Soda; if more people buy pizza because it is on sale, the demand for soda will likely rise as well.

Substitutes

Goods that can replace each other; when the price of one rises, demand for the other increases.

Example: Pizza and Burgers; if the price of pizza becomes too high, people will switch to buying burgers instead.

Elasticity of Demand

Measures how much the quantity demanded of a good responds to a change in price.

Example: It calculates whether a 10\% change in the price of pizza leads to a small or large change in the number of pizzas sold.