Demand, Price and Quantity
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The definition of Demand
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Demand is the Willingness, Desire and Ability to buy a good at a specific Price, Quantity and Time
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*You must mention these 6 words for the definition of demand
The law of demand
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Whenever there is an increase in price of a good, the demand for that good will decrease, or if there is a decrease in price of a good, the demand of a good will increase. Ceteris Paribus.
The demand curve
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Demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time. Its typically downward sloping
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The demand curve diagram will always have ‘Price’ on the Y axis and ‘Quantity demanded’( henceforth referred to as ‘QD’) on X axis.
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Points where the values of ‘Price’ and ‘QD’ meet are plotted to make the demand curve, which is labelled as ‘D’ or ‘D1’.
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When we draw it, we tend to make it as a straight line as this is much simpler and easy to understand. [Practically the curve will indeed be a curve.]
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However for exams you will be ok with drawing a straight line for the ‘curve’
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{In the graph we can see that due to a price decrease from P1 to P2 there has been a QD increase of QD1 to QD2}
Movements along the demand curve
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There are 2 types of movements along the curve, Extension and contraction.
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These will only happen if a change in the price of the good is reason behind the change in demand.
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Extension: A extension in demand means the demand extends[increases] due to a reduction in price [change in Price P1 to P2 has caused an extension in demand]
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Contraction: A contraction in demand means the demand contracts[decreases] due to a increase in price[change in Price P1 to P3 has caused a contraction in demand]
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These changes occur due to the law of demand; if price increases demand contracts/ if price decreases demand extends.
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There are 2 types of movements along the curve, Extension and contraction.
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These will only happen if a change in the price of the good is reason behind the change in demand.
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Extension: A extension in demand means the demand extends[increases] due to a reduction in price [change in Price P1 to P2 has caused an extension in demand]
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Contraction: A contraction in demand means the demand contracts[decreases] due to a increase in price[change in Price P1 to P3 has caused a contraction in demand]
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These changes occur due to the law of demand; if price increases demand contracts/ if price decreases demand extends.
Growth in Production Possibilities
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An outward shift of the PPC, indicating an increase in an economy's capacity to produce goods and services due to factors like improved technology or increased resources.
Increasing Opportunity Cost
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As more of one good is produced, the opportunity cost increases,
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shown by the bowed-out shape of the PPC.
Constant Opportunity Cost
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A straight-line PPC indicating that the opportunity cost of producing one good in terms of another remains constant.
Circular flow of income model
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A model illustrating the flow of goods and services, resources, and money in an economy between households and firms.
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It shows how economic activity is interrelated.
Households and Firms
Households
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​Consumers who provide factors of production (land, labor, capital, and entrepreneurship) to firms and receive income (wages, rent, interest, and profits) in return.
Firms
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Businesses that produce goods and services, which they sell to households and other firms.
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They pay households for the use of factors of production.
Goods and Services Market
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Where households purchase goods and services produced by firms.
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This represents consumer spending in the economy.