Ch 3 & 4 Demand Flashcards
Define– Complement.
A good that is often needed when consuming another good. For instance, sugar can be seen to be a complement to tea.
Define– Consumer surplus.
The difference between what a consumer actually pays for a good and the maximum they would have been willing to pay for it. In a sense it represents the ‘profit’ to a consumer. By definition, if a consumer is rational, then they only purchase goods that they feel are worth more than what they have to pay for them.
Define– Demand.
Reflects the choices made by consumers over the consumption of specific goods. In almost all cases we would expect that if price goes up, all else being equal, the quantity demanded for a good goes down
Define– Demand curve.
A graph showing the relationship between the quantity demanded of a good and its price when all other variables are unchanged
Define– Inferior goods.
Goods for which demand decreases as income increases.
Or said another way, goods that increases when income decreases. Like ramen noodles
Define– Law of diminishing marginal utility.
A hypothesis that states that as consumption of a good increases so the marginal utility (extra benefit gained) decreases
Define– Market demand.
Summation of all individual demand for a particular good within a market
Define– Demand.
Amount of a good that consumers are willing and able to buy at various prices.
Reflects the choices made by consumers over the consumption of specific goods. In almost all cases we would expect that if price goes up, all else being equal, the quantity demanded for a good goes down
Define– Substitutes.
Goods that can be used in place of other goods (e.g. tea and coffee may
be seen as substitutes)
Define– Substitutes.
Goods that can be used in place of other goods (e.g. tea and coffee may be seen as substitutes)
Define– Utility.
Satisfaction a person gets from consuming a good.
What are 2 reasons to study demand?
- help us predict behaviors and reactions
- helps us understand what people value
- can help inform policy decisions
Define – quantity demanded
The amount that households are willing and able to buy and this is not necessarily the same as how much they do buy.
Ex– willing to buy something if it costs $5, but if it’s $7, they won’t buy it.
Demand is a function of what (formula).
What do the different components stand for?
D= f (P, Y, Pc, Ps, T)
f (...) is standard mathematical notation and means ‘is a function of’ P = price of the good Y = income Pc = price of complementary goods Ps = price of substitute goods T = tastes or preferences
Why does the demand curve slope downwards from left to right?
- substitution-effect. If cost of coffee goes up, our satisfaction of drinking coffee doesn’t change, but our satisfaction of the cost per pound is less than say the cost per pound of tea. So we may consume less coffee and more tea.
- income effect. Rise in price will essentially mean a lowering of your income if you continue to buy the same amount, so in response you’ll buy less in order to maintain enough income to purchase your other needs.
What causes a “movement” and “shift” on the demand curve?
Movement- changes in prices or demands
Shift- changes in other variables ( tastes and preferences, incomes, prices of other goods, etc.)
Define– Marginal utility
The change in total utility resulting from a one-unit increase in the quantity of a good consumed.
What are the ways in which health care complicates the simple model of supply and demand?
- pt’s need dictated by doctor (the supplier)
- pts have different ailments and responses to interventions
- if issue is addressed, pt often won’t buy more
- third party payers
- pts often defer informed decisions to their doctors
Define– Marginal utility
Define– diminishing marginal utility
The change in total utility resulting from a one-unit increase in the quantity of a good consumed.
With each additional unit of consumption, there’s less additional satisfaction.
Why does demand increase when the price falls?
- income will appear higher and thus they have more income to buy what they need
- they will start buying more of this good to substitute for goods they can not afford
Why does demand increase when the price falls?
This is especially true in what types of goods?
Not true in what types of goods?
- income will appear higher and thus they have more income to buy what they need
- they will start buying more of this good to substitute for goods they can not afford
Normal goods, reinforces each other so that the change is in the same direction.
Inferior goods, decreases demand as income increases.
Define– Cross price-elasticity of demand.
The percentage change in quantity demanded of a good divided by the percentage change in the price of another related good.
Define– Income elasticity of demand.
The percentage change in quantity demanded of a good divided by the percentage change in population income.
Define– Price elastic.
Change in price produces a more than proportionate change in quan- tity demanded.
Define– Price elasticity of demand.
The percentage change in quantity demanded divided by the associated percentage change in price.
Define– Price elasticity of supply.
The percentage change in quantity supplied of a good divided by the percentage change in the good’s own price.
Define– Price inelastic.
Change in price produces less than proportionate change in quantity demanded.
vertical line = inelastic (slope <1)
horizontal line = elastic (slope >1)
slope = 1 unit proportional
What does the demand curve for a “perfectly inelastic” curve look like?
What is on the x and y- axis?
a straight vertical line
x = quantity Y= price
What does the demand curve for a “perfectly inelastic” curve look like? Elasticity = what in this situation?
What is on the x and y- axis?
a straight vertical line. elasticity = 0
x = quantity Y= price
What does the demand curve for a “perfectly inelastic” curve look like? Elasticity = what in this situation?
What is on the x and y- axis?
a straight vertical line. elasticity = 0
example is insulin, demand is still pretty consistent despite change in price because it’s necessary.
x = quantity Y= price
If the percentage change in the quantity demanded equals the percentage change in price, this is called what?
The elasticity of demand = what?
Unit elastic.
Elasticity = 1
What does PED > 1, = 1, and < 1 mean?
If PED > 1 then demand is price elastic (demand is sensitive to price changes)
If PED = 1 then demand is unit elastic
If PED < 1 then demand is price inelastic (demand is not sensitive to price changes)
What are some factors that affect the elasticity of demand of a good?
Availability of substitute goods: Percentage of income Time period: Necessity Who pays: Brand loyalty:
