Determinants of the demand for G+S , PED

• what is the definition of demand?

  quantity of goods and services consumers are willing and able to buy at a given price , at a given time in a given market
• what is the rational choice theory?

  the assumption that consumers make decisions that maximise their utility / satisfaction
• what is effective demand?

  the desire consumers have to purchase a good or service backed up by their ability to pay
• what is market demand?

  the sum of all individual demand
• what is the relationship between price and quantity demanded?

  inverse / negative as when the price of the good increases the quanitity demanded falls (when all other things are equal ) this is the law of demand
• what causes movement along a demand curve ?

  change in price

  1. Contraction - price increases = demand falls
  2. Expansion - price decreases = demand increases
• why do consumers real income fall as price increases?

  they lose their purchasing power as they are not able to buy as much this is the income effect of the rise in price
• what is the income effect?

  as price increases , consumers have less real income = demand less
• Factors affecting demand: PIRATES

  P - population = higher pop = higher demand

  I - income = more disposable income = more consumption = more demand

  R - related goods (subs + complementaries)

  A - advertising = increase demand

  T - taste = demand shifts depending on consumers tastes e.g physical books fall as e-books increase

  E - expectations of future prices

  S - seasons e.g ice-cream increases during summer
• what type of good increases in demand as income increases?

  normal
• what are inferior goods?

  goods that will have a fall in demand for as income rises
• what is a substitute good?

  a good that is in competing demand as it is an alternative for another good that may be more expensive

  • if price of good A increases its demand will fall as the demand of good B increases
• what are complementery goods?

  goods bought alongside / joint with a good or service

  • if price of good A increase price of price B would also increase
  • e.g DVD players and DVDs
• how can the law effect demand?

  gov can impose bans such as the smoking ban in 2007 (cannot smoke indoors)
• what is marginal utility?

  the benefit gained from consuming a one more unit of a good or service

  • if the consumer receives satisfaction from a g or s they will be more willing to buy it = demand increases (vica versa)
• what does elastic mean?

  demand will be greater than change in price

  • very responsive to price changes
  • many substitutes
  • products are widely available
• what is price elasticity of demand?

  measures the responsiveness of quantity demanded after a price change
• how can the PED be calculated?

  % change in quantity demanded / % change in price
• What is a demand curve?

  
• What is the law of diminishing marginal utility?

  The satisfaction received by obtaining one more unit of a good declines as one consumes more of it.
• What are some exceptions to the law of demand?

  Speculative demand - as prices rise, people may suspect a further rise in prices causing an increase in demand now (with the hopes of selling the good on later)

  
  

  Goods for which price is an indicator of quality - some consumers use price to determine quality (due to a lack of information) and thus demand more of a good or service if price increases

  
  

  Veblen Goods - snob goods, goods that are so rare that few people can ever acquire it.
• What are the 5 PED graphs?

  Perfectly elastic demand - PED is infinite

  Unit Elastic demand - PED = 1

  Completely inelastic demand - PED = 0

  Elastic Demand graph - PED > 1

  Inelastic Demand graph - 0 < PED < 1

  
• What are the factors affecting PED?

  Degree of Necessity - if it is needed for survival, it will be inelastic

  
  

  Availability of Substitutes - if there are many substitutes, the good will be elastic

  
  

  Habitual demand - if it is addictive, the good will be fairly inelastic

  
  

  Proportion of income spent on the good - if good takes up a large proportion of your income, you will look for alternative, thus making it very elastic

  
  

  Durability of the good - goods that last a long time are more elastic as people wait to purchase them

  
  

  Peak and off-peak demand - during peak times demand is more inelastic
• What are the effects of taxes on PED?

  Inelastic goods - most of the tax burden goes on the consumer. This is used to increase government revenue.

  
  

  Elastic goods - most of the tax burden goes to the producer, therefore the producer produces less of a good. This is used to reduce the demand for a demerit good

  
• What is income elasticity of demand (IED)?

  The measure of responsiveness of quantity demanded to a change in income
• How do you calculate IED?

  % change in quantity demanded / % change in income
• What can be said about the IED of an inferior good?

  It is always negative
• What can be said about the IED of a normal good?

  It is always positive
• How can normal good be grouped?

  Superior goods (luxuries) - IED>1

  Basic goods - 0 < IED < 1
• What is cross elasticity of demand (XED)?

  The measure of responsiveness of quantity demanded for one product to a change in the price of another product.
• How does the graph slope for complementary goods?

  Downwards

  Negative XED

  If one good becomes more expensive quantity demanded for both goods will fall

  
• How does the graph slope for substitute goods?

  Upwards

  XED positive

  
• what is the substitution effect?

  as price increases , consumers substitute for a product that gives more satisfaction
• what does a perfectly elastic good mean?

  demand will fall to zero when price changes
• what does a perfectly inelastic good mean?

  demand will not change when price changes
• what is a unitary elastic good?

  the change in price is equal to the change in quantity demanded
• what is the relationship between PED and total revenue for a firm?

  Inelastic goods - firms can increase their prices = increases their revenue as quantity demanded won't significantly fall

  Elastic goods - if firms increase their prices quantity demanded will fall = total revenue will fall
• what type of good sees a fall in demand as income increases?

  inferior goods e.g instead of shopping at Lidl people will shop at Waitrose
• what type of good will see an even bigger increase in demand as income increases?

  luxury goods
• how do you calculate XED?

  % change in QD of product A / % change in price of product B