Micro - chapter 2

• What is the Law of Demand?

  As price rises, quantity demanded falls
• What happens to quantity demanded when price per unit falls?

  Quantity demanded tends to rise
• What factors affect demand?

  • Population
  • Advertising
  • Substitutes (price of)
  • Income levels
  • Fashion and tastes
  • Interest rates
  • Competition
• How does an outward shift of demand affect quantity demanded?

  More is demanded at each price level
• What is the relationship between price and quantity demanded?

  Inverse relationship
• What is price elasticity of demand (PED)?

  Responsiveness of quantity demanded to price changes
• How is price elasticity of demand calculated?

  PED = % change in quantity demanded / % change in price
• What does a PED of 1 indicate?

  Exactly proportional response to price changes
• What is the elasticity of necessities in terms of income elasticity?

  Income elasticity is less than 1
• What happens to spending on necessities as income grows?

  Less is spent on necessities proportionally
• What characterizes inferior goods in terms of income elasticity?

  Demand falls as income increases
• What does a negative income elasticity indicate?

  Consumers switch to better alternatives
• What is cross elasticity of demand used to measure?

  Responsiveness of quantity demanded of one good to price changes of another
• What does a positive cross elasticity indicate?

  Substitutes; demand increases for one good
• What does a negative cross elasticity indicate?

  Complements; demand increases for one good
• What is the formula for calculating cross elasticity of demand?

  Cross elasticity = % change in quantity demanded of A / % change in price of B
• What does perfect elasticity mean in terms of PED?

  PED = ∞; extremely responsive to price changes
• What does perfect inelasticity mean in terms of PED?

  PED = 0; does not respond to price changes
• What are the types of elasticity in demand?

  • Price elasticity of demand (PED)
  • Income elasticity of demand
  • Cross elasticity of demand
• What is the effect of an increase in the price of a substitute good?

  Demand for the original good increases
• What happens to demand for complements when the price of one product increases?

  Demand for the complement decreases
• How does competition affect demand?

  Increased competition can lower prices and increase demand