Demand & Elasticity.

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What is demand?
The want or desire to obtain a product or service and the willingness and ability to pay for it.
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What is a change in demand?
A change in any factor that effects buyers willingness + ability to purchase (other than price) will cause a change to underlying demand conditions.
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What will a change in price cause on the demand curve?
No movement of the actual curve - just movement along the curve to reflect the change in price.
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What is the law of demand?
All else equal, the lower the price of the good, the higher the demand and the higher the price of the good the lower the demand.
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What is the income effect?
If price is high you can afford to buy fewer units with your fixed income.
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What is the substitution effect?
As the price rises, similar goods become more attractive to you so you switch to alternatives.
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What is the diminishing marginal utility?
If you get less utility each excessive use of consumption you will only buy more if the price is lower to reflect the low utility you get.
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Give an example of diminishing marginal utility using chocolate bars and multipacks offered in stores.
One bar of choc. is 60p - a multipack is £1. Each additional unit we acquire offers less utility than the one before.
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What is a consumer surplus?
The maximum price customers are willing to pay minus selling price equals consumer surplus.
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Give some determinants of demand.
Price, taste & preference, income, consumer expectations of the future, price of related goods (substitutes/compliments)
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What is a market?
Buyers and sellers exchanging. Price is a fundamental part of the decision making process.
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What is elasticity?
It measures how much a change in one thing effects some other thing, all else equal.
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What is price elasticity of demand?
It measures how responsive the quantity demanded is to a change in price (price sensitivity), all else equal.
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What is income elasticity of demand?
It measures the responsiveness of quantity demanded to a change in income.
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What is cross-price elasticity of demand?
It measures the responsiveness of quantity demanded to a change in the price of related goods.
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Name some determinants of price elasticity.
Availability of substitutes, how narrowly we define our product or service, necessity or luxury, ease of switching supplier, price relative to income and addictiveness.
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How do you calculate price elasticity of demand?
% change in quantity demanded/ % change in price.
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How do you calculate a percentage change?
(The change(new value - old value)/The old value) x 100
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How do you measure elasticity?
% change in quantity demanded ((change in qd/old qd) x100)/% change in price ((change in P/old P) x100)
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How do you calculate cross-price elasticity?
% change in QD/% change in price of related good
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Interpretation of income elasticity of demand
Higher than 0 is a substitute, lower is an inferior good and exactly 0 has no relationship.
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Interpreting PED - what does = 0 mean?
No relationship, Qd is totally unresponsive to P. Perfectly inelastic.
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Interpreting PED - what does -1
Change in P leads to a extremely smaller change in Qd. Inelastic.
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Interpreting PED - what does =-1 mean?
1 for 1 relationship between P and Qd. Unit elasticity.
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Interpreting PED - what does
Change in P leads to a proportionately larger change in Qd. Elastic.
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Interpreting PED - what does a minus infinity sign mean?
Change in price leads to an infinite change in Qd. Perfectly elastic.
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Card 2

Front

What is a change in demand?

Back

A change in any factor that effects buyers willingness + ability to purchase (other than price) will cause a change to underlying demand conditions.

Card 3

Front

What will a change in price cause on the demand curve?

Back

Preview of the front of card 3

Card 4

Front

What is the law of demand?

Back

Preview of the front of card 4

Card 5

Front

What is the income effect?

Back

Preview of the front of card 5
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