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Section 2 - Competitive markets - Demand - Coggle Diagram
Section 2 - Competitive markets - Demand
Deamnd curves
Demand is the quantity of a good/ service that consumers are williing and able to buy at a given price
Demand curve shows the relatio nbetween price and quanitity demanded
At any point the curve, you can see the quantity of goods that would be bought at this price
Usually slopes downard, higher prices charged lower the quantity of goods demanded
Consumers aim to pay the lower possible price, at lower prices, more consumers are willing and able to purchase goods, so lower prices mean higher demand
Changes in demand
Curve moves to the left when there is a decrease in amount demanded at each price
Curve moves the right when there is an increase in amount demanded at every price
Factors
Tastes and fashion - demand changes if tastes change
Income - More disposable income means consumers can afford more goods. people demand less off if their real income increases, rise in income causes a shift to the left as less is demanded at each price
Advertising - increase consumer loyalty
Population - larger population leads to higher demand
Related goods - (substitutes of compliments) affect how much a good is demanded
Expectation - Anticipated future price changes can cause price of shares in a company to increase
Seasons - demand changes according to season
One market affecting another
Substitue goods are those which are alternative to oneanother, an increase in the price of one will lead to a decrease in demand of it and an increase in demand for the other
Complementary goods are those which are often used together, if the price increases for one, the demand for both will decrease
A new product that causes a shift to the left could be a substitute, and to the right for goods that are complementary to it
Derived demand is demand for a good used in making another goods, increase in demand for fencing would increase derived demand for wood
Composite demand is when some goods have more than one use, changes is demand for fuel could affect plastics
Types of deamnd
Effective demand - demand backed by the ability to pay
Potential demand - Ability to pay but not willing to
Latent demand - wants not backed by the ability to pay
Diminishing marginal utility
Demand is downward sloping, showing the inverse relationship between price and quantity
As an extra unit of the good is consumed, the marginal utility benefit derived from consuming the good falls, consumers are willing to pay less
Price Elasticity of demand
Measures the responsiveness of the quantity demanded to changes in price
PED = % change in Q demanded / % change in price
Elastic
PED > 1
% change in price will cause a larger % change in quantity demanded
Higher PED = more elastic
Revenue
An increase in price causes a decrease in revenue
A decrease in price will cause an increase in revenue
Inelastic
PED < 1
% change in price will causes a smalled % change in the quantity demanded
Smaller PED = more inelastic
Revenue
An increase in price causes an increase in revenue
A decrease in price causes a decrease in revenue
Unit elasticity
PED = 1
% change in price = % change in quantity demanded
Factors
Substitutes
More substitutes a good has, the more elastic demand is
If there are many substitutes, consumers can easily swith to something else if price rises
Type of good
Demand for essential items is inelastic
Demand for non essential items is elastic
Demand for habit forming goods is inelastic
Percentage of income spent
Demand for products that need a larger proportion of consumer's income is more elastic
Demand for products that need a smalled proportion of consumer's income is less elastic
Time
Long run = demand becomes more elastic as it becomes easier to change to alternatives
In the long run habits can change
Income elasticity of demand
Measures how demand responds to a change in income
Negative for inferior good - quantity demanded decreases with income
Normal goods
Positive YED for normal good - quantity demanded for normal goods increases with income
Superior goods, YED > +1
Basic goods, 0 < YED < 1
% change in demand / % change in income
Cross-elasticity of demand
Responsiveness of demand for one good to changes in the price of another good
% change in QD for good A / % change in P for B
Positive CED = Goods are substitutes
Negative CED = Goods are complementary