Units 5/6/7

Law of Demand

When the price of a product increases, demand will fall

Law of Supply

When the price of a product increases, production will increase

Demand

The amount of a good or service that consumers are willing and able to buy at different possible prices

Graph of Demand

Goes down to the right

Graph of Supply

Goes up and to the right

Buying Power

The change in consumption patterns due to the change in purchasing power

Income Effect

Same as buying power

Diminishing Personal Value

As prices rise consumers will only buy what is most important

Diminishing Marginal Utility

No matter the price the usefulness of a product will reduce with each additional product bought

Substitute Goods

A good or service that can replace another good or service

Complementary Goods

A good that is consumed with another good

Price Elasticity of Demand

How much the price changes the quantity of demand

Price Elasticity of Demand Formula

Percent change in quantity over percent change in demand

Elastic

Sensitive to price changes

Inelastic

Insensitive to price changes

Determinants of Elasticity of Demand

Availability of substitutes, time horizon, category of product (Specific or broad), necessity vs. luxury, purchase size relative to consumer’s budget

Relatively Elastic

PED >1 (more horizontal)

Unit Elastic

PED=1

Perfectly Elastic

PED = infinity (Horizontal Line)

Relatively Inelastic

PED

Perfectly Inelastic

PED= 0 (Vertical Line)