Supply and Demand

Flashcards on Demand

Demand

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

Law of Demand

Consumers will buy more of a good when its price is lower and less when its price is higher.

Substitution Effect

When consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good.

Income Effect

The change in consumption that results when a price increase causes real income to decline.

Demand Schedule

A table that lists the quantity of a good a person will buy at various prices in a market.

Market Demand Schedule

A table that lists the quantity of a good all consumers in a market will buy at various prices.

Demand Curve

A graphic representation of a demand schedule.

What is the law of demand a result of?

substitution effect and income effect

ceteris paribus

a Latin phrase that means “all things held constant”

normal good

a good that consumers demand more of when their income increases

inferior good

a good that consumers demand less of when their income increases

demographics

the statistical data of a population, including age, race, gender, income, and education, often used in marketing and economic analysis.

complements

products that are often used together, where an increase in the demand for one leads to an increase in the demand for the other.

substitutes

goods that are used in place of one another

Why does the demand curve shift?

Income, Consumer Expectations, Population, Demographics, Consumer Tastes & Advertising

Normal Goods

An income increases demand increases and income decreases demand decreases

Inferior Goods

As income increases demand decreases. As income decreases demand increases.

How will an anticipated rise in price affect consumer demand for a good?

Consumers may buy more now to avoid paying higher prices later, increasing current demand.

elasticity of demand

a measure of how consumers respond to price changes

inelastic

describes demand that is not very sensitive to price changes

elastic

describes demand that is very sensitive to price changes

unitary elastic

describes demand whose elasticity is exactly equal to 1

total revenue

the total amount of money a company receives by selling goods or services

What factors affect elasticity of demand

Original price and how much you want a particular good are both factors that will determine your demand for a particular product.

Elasticity of demand

the way that consumers respond to price changes

Your demand for a good that you will keep buying despite a price change is…

inelastic

If you buy much less of a good after a price increases, your demand for that good is…

elastic

Factors of Elastic demand

the availability of substitutive goods, and item that isn’t a necessity, and the perception of a good as a luxury item

Example of inelastic

Gas and prescription drugs

Examples of elastic

orange juice and luxury cars

If a good has many substitiutes, consumer demand tends to be…

Elastic

If an item is a necessity, consumer demand tends to be….

inelastic

Equation for Elasticity

Elasticity= percent change in quantity demanded / percent change in price

How to find percent change

percent change = OG number- new number / OG number x 100

If greater than 1 elasticity of demand is

elastic

If less than 1 elasticity of demand is

inelastic

If equal to 1 elasticity of demand is

unitary elastic

A decrease in the price of lemons from $10.50 to $9.50 per bushel increases the quantity demanded from 19,200 to 20,800 bushels. The price elasticity of demand is?

.87 and inelastic

How to find revenue

price x quantity demanded

Joe’s Car Washes washes 800 cars per month at a price of $20. Car washes have an elasticity of 0.8 1. What is their current revenue per month? 2. If they were to increase the price of their car washes by $2.00, what do you predict would be the effect on revenue based on the elasticity of car washes?

1. $16,000 per month. 2. Revenue would likely decrease based on inelastic demand.