Ch. 2 - Demand & Supply

Question 1

What is an Individual Demand Curve?

Answer 1

Plots the quantity someone plans to buy of something at each price

• Shows demand for only one individual
• Holds all other things constant
• Always follows the law of demand, will have a downward slope
• Demand curve = marginal benefit

Question 2

What is the Law of Demand?

Answer 2

As prices increase, quantity demanded will fall (& vice versa)

Question 3

What is the Rational Rule for Buyers?

Answer 3

Buy more of an item if the marginal benefit of one more is >= the price

Question 4

What is Diminishing Marginal Benefit?

Answer 4

Marginal Benefit of each additional item is smaller than the marginal benefit of the previous item

Question 5

What is a Market Demand Curve?

Answer 5

Plots the total quantity of goods demanded by the market (all potential buyers) at each price

• Holds all other things constant
• Always follows the law of demand, will have a downward slope
• Demand curve = marginal benefit

Question 6

What will cause movement on the demand curve (not shift)? What will the outcome be?

Answer 6

Price changes, yielding a change in quantity demanded

Question 7

What will cause the demand curve to shift (not movement)?

Answer 7

When you no longer hold all else constant, the demand curve will shift

• This occurs when other factors beyond price are considered (Interdependence Principle)
• Any factors that change your marginal benefit will shift your demand curve
• A right shift is an increase in demand
• A left shift is a decrease in demand

Question 8

What are the 6 Factors Shifting the Demand Curve?

Answer 8

1. Income
2. Preferences
3. Prices of Related Goods
4. Expectations
5. Congestion & Network Effects
6. The type & number of buyers (only shifts market demand)

Question 9

What is a normal good? What is an inferior good?

Answer 9

Normal Good - A good for which higher income causes an increase in demand (ex. iPhones)

Inferior Good - A good for which higher income causes a decrease in demand (ex. Kraft Dinner)

Question 10

What is a complimentary good? What is a substitute good?

Answer 10

Complimentary Goods - Goods that go together. Your demand for a good will decrease if the price of a complementary good rises

Substitute Goods - Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises

Question 11

What is the network effect? What is the congestion effect?

Answer 11

Network Effect - When a good becomes more useful because other people use it. If more people buy such a good, your demand for it increases (ex. social media apps)

Congestion Effect - When a good becomes less valuable because other people use it. If more people buy such a good, your demand for it will decrease (ex. driving on the highway)