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