Demand

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Demand
This the quantity of goods and service = bought at any given price
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Demand and Price
Everything else stays the same (cetrius parabus) Demand curve = shows the quantity that is demanded at any given price Demand = downward sloping
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The curve
Price change = movement along the demand curve Extensions of demand = when quantity demanded rises Contraction of demand: when demand falls Demand curve shows effective demand = shows how much would be bought at any given price
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Conditions of demand
Factors apart from price that affect demand Changes in the conditions = cause a shift in demand curve
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Demand and Income
Demand for a normal good = rises when income rises
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Inferior goods
fall in demand when income rises (cheaper goods)
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Normal goods
Economists = rise in income = lead to an increase in demand for normal goods Fall in income = fall in demand = normal good Demand curve = shift left
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The price of other goods
A rise in another good may increase demand for a related good This may also have a negative impact on other goods
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Other factors
Changes in population Changes in fashion Changes in legislation Advertising
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Law of diminisshing marginal utility
Demand curve = show how much buyers would be prepared to pay for a quantity of goods The more buyers are offered = less value they put on the last one bought 1 chocolate = £1 however after 2 chocolates they may get less satisfaction = pay less
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Definition
Utility attached to consuming the last product bought falls = more units consumed over a period of time E.g. cinema ticket = £5 after watching the movie they may be prepared to watch another movie the next day but values this one less
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Negative marginal utility
Eventually they will begin to experience negative marginal utility
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Adam smith was puzzled?
Adam Smith was puzzled = why would people buy diamonds (unnecessary to human existence) – whilst price of necessities are so cheap Known as the Paradox of Value: law of dmu can solve this Few goods available – like diamonds –
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Why like diamondS?
consumer prepared to pay a high price – marginal utility high Good are plentiful – like inferior goods = consumer prepared to pay a low price = last one consumed has low marginal utility
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Consumer surplus
Difference between values to buyer to what they actually pay E.g. cinema ticket = £5 and a student was willing to pay £7 consumer surplus = £2 Another student willing to pay £6 consumer surplus = £1 Total consumer surplus = £3
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Price elasticty of demand
The responsiveness in quantity demand to changes in price of product
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The equation
(percentage change in quantity demanded)/(perecentage change in price)
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% change
% Change = (new-old)/old
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Price elastic
Elastic: value of elasticity is greater than one – Why? % Change in price will bring about a greater than proportionate % change in quantity demanded (things people don’t need – luxuries)
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Example
E.g. 10% rise in price of tomatoes = 20% fall in quantity demanded 20/10 = 2 – elastic - look at notes for diagram
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Causes
Many substitutes A large proportion of income spent on it Luxury For the longer term
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Revenue effected
When demand is price elastic: An increase in price leads to a fall in revenue A decrease in price leads to an increase in revenue
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Inelastic
value of elasticity is less than one Why? % Change in price will bring about a less than proportionate % change in quantity demanded – (things people need - necessities)
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Example
E.g. 10% rise in price of tube fares = 1% falls in journeys made 1/10 = 0.1 – inelastic
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Causes
Fewer substitutes A small proportion of income spent on it Necessity For the short term
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Revenue effected
An increase in price leads to a increase in revenue A decrease in price leads to an decrease in revenue
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Perfect elasticity
: if value of elasticity is ∞ Why? Because a fall in price would lead to an infinite increase would lead to an infinite increase in quantity demanded A rise in price would lead to the quantity demanded = 0
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Perfectly inelastic
if the value of elasticity = 0 Why? A change in price would have no effect on quantity demanded
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Unitary elasticity
if the value of elasticity = 1 Why? A % change in price would lead to an exact and opposite change in quantity demanded.
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Example
E.g. good = 10% rise in price = 10% fall in quantity demanded
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Substitues
Substitutes and compliments can affect PED Substitutes: if spaghetti prices rises there are different substitutes of pasta (if there price remains constant) = high demand elasticity Salt prices rise = not many substitutes = low demand elasticity
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Time
also effect PED – if oil price increases over 5 years the first year it will be inelastic as people still need to commute and get places however when time goes on they will probably get more fuel efficient cars making oil elastic
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income elasticity of demand
measure of the demand for a good when there is change in a consumer’s income
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high income elasticity
When demand increase when income increases – said to be relatively high income elasticity of demand E.g. holidays 0 income elasticity = When demand is unchanged when income rises
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Negative income elasticity
below 0 When demand decrease when income increases Low elasticity of demand = washing up liquid
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Neccesties income elasticty
less than 1
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Luxury goods income elasticty
greater than 1
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Cross elasticty of demand
measure the proportionate response of Qd of one good to the proportionate change in the price of another
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Equation
(percentage change in quantity demanded of good X)/(percentage change in price of good Y)
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Examplr
E.g. it is a measure of the extent to which demand for pork increases when the price of beef goes up
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Substitues and compliments
Substitutes: A rise in price of beef would increase the Qd of pork/chicken Two substitutes have a positive cross elasticity
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Compliments
Complements: A rise in price of cheese would cause a fall in Qd of macaroni A complement is good which is demanded because it is used with another good Complements = negative cross elasticity
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Non - related goods
do not affect each other Qd E.g. rise in price of cement has no impact on the demand of chocolate Cross elastic = 0 - look at notes for diagrams
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Other cards in this set

Card 2

Front

Demand and Price

Back

Everything else stays the same (cetrius parabus) Demand curve = shows the quantity that is demanded at any given price Demand = downward sloping

Card 3

Front

The curve

Back

Preview of the front of card 3

Card 4

Front

Conditions of demand

Back

Preview of the front of card 4

Card 5

Front

Demand and Income

Back

Preview of the front of card 5
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