Kime Law of Demand Quiz

what is demand?

the desire, ability, and willingness to buy a product at a range of prices at a particular period of time.
represents the consumers pov

law of demand

the quantity demanded varies inversely with the price of the product

income effect

phenomenon that consumers feel richer when prices decreases, tends to purchase more

substitution effect

if a price gets too high, the consumer will buy the substitution instead

law of diminishing marginal utility

as we consume additional units of something, the satisfaction or utility from each additional unit will decrease.

Changes in Quantity Demanded

• a change in the number of products because of a change in price.

• represented by movement along demand curve

• change in price change in quantity demanded

changes in demand

• a change in quantity demanded at each & every possible price
  represented by entire curve shifts

• left or right - no up or down

non price determinants of demand

1. consumer income

   1. normal goods vs. inferior goods

2. consumer tastes, needs and fads

3. consumer expectations

4. number of consumers, demographics

5. prices of related products

Prices of related goods

• substitutes or compliments

price elasticity of demand

the extent to which changes in price causes changes in quantity demanded

price elastic

change in price causes a large change in quantity demanded

price inelastic

a change in price causes a small change in quantity demanded

determinants of price elasticity of demand

SPLAT

1. substitute avaliability

   1. no subs:elastic - many subs: inelastic

2. proportion of income

   1. high proportion:elastic - low proportion:inelastic

3. luxury or necessity

   1. luxury:elastic - necessity:inelastic

4. addictiveness

   1. addictive:inelastic - regular:elastic

5. time to respond/need

   1. more time:elastic - less time:inelastic

Elasticity Coefficiant

mathematical way to determine elasticity or inelasticity

PED = (%ΔQD) / (%ΔP)

Elasticity Coefficient Relations

if PED < 1 = elastic
if PED < 1 = inelastic

if PED == 1 = unit elastic

if PED == 0 = perfectly inelastic

Price Elasticity to Total Revenue

Cross Price Elasticity of Demand

XED = (%ΔQD) / (%ΔP)
With Good A & Price B

Cross Price Elasticity of Demand Relations

if XED is negative = compliments

if XED is positive = substitutes

Income Elasticity of Demand

XED = (%ΔQD) / (%Δincome)

Income Elasticity of Demand Relations

if YED positive = normal good

if YED negative = inferior good

if YED > 1 elastic

if YED < 1 inelastic