Chapter 4 - Consumer Demand Flashcards
What is demand?
The ABILITY and WILLINGNESS to buy specific quantities of a good at alternative prices in a given time period
What is MARKET demand?
The TOTAL QUANTITIES of a good or service people are willing and able to buy at alternative prices in a given time period. it is the SUM of all individual demands
What are the 2 determinants of demand?
- Sociopsychiatric Explanation
- Economic explanation
Describe the “economic explanation” of demand
Willingness and ability to pay, market demand for a specific product is determined by:
Taste
Income
Expectations
Other goods
Number of consumers in the market
What is the utility theory?
The more pleasure a product gives, the higher price buyers are willing to pay
“Utility”
Satisfaction
What is the definition of utility?
Pleasure or satisfaction obtained from a good or service
What is marginal utility
Change in total utility obtained by consuming one additional (marginal) unit of a good or service
What is total utility
Amount of satisfaction obtained from ENTIRE consumption of a product (sum of all marginal utilities)
When determining what to buy for the highest utility possible, divide what by what to find ACTUAL marginal utility?
marginal utility/price
As long as marginal utility is _______, total utility will increase
positive
Total utility will only decrease when ..?
Marginal utility is a negative number
What is the Law of diminishing marginal utility?
Marginal utility of a good declines as more of it is consumed in a given time period. only applies in a SHORT TIME PERIOD situtation
What is on the x and y axis for the graph of marginal utility?
y axis: marginal utility
x axis: quantity
What is on the x and y axis for the graph of total utility?
y axis: total utility
x axis: quantity
Economists focus on the relationship between _____ and ______ to determine how much we are willing to buy
price and quantity
What 2 things explain the downward slope of the demand curve?
- The concept of marginal utility
- relationship between price and quantitiy
People are only willing to buy additional quantities of a good if…?
the price falls
The higher the marginal utility, the _____ you are willing to pay
more
What is the price elasticity of demand?
Method of measuring consumers’ responses to a change in price
What is the formula for price elasticity?
percentage change in quantity demanded/percentage change in price
A price elasticity value of 0.5 indicates that…?
Sales decline at half the rate of price increases
What is elastic demand?
Quantity demanded is SENSITIVE to price
When is demand considered elastic?
When E is greater than 1
What is inelastic demand?
Quantity demanded is relatively insensitive to price
When is demand considered inelastic?
E is less than 1
What is unitary elastic demand?
As the price of the good changes, (increases/decreases), producer’s total revenue remains the same
When is demand considered unitary elastic?
absolute value of E = 1
Why can producers not charge the highest possible price?
the concept of price elasticity
higher prices can ______ total sales revenue
reduce
How to calculate total revenue?
Total revenue = price*quantity sold
If demand is inelastic, price increase will cause total revenue to ______
increase
If demand is unitary elastic, price increase/decrease will cause revenue to _____
remain the same
If demand is elastic, price decrease will cause revenue to _______
increase
What are the 3 determinants of price elasticity
- Necessity or luxury (necessity = inelastic, luxury = elastic)
- Availability of substitutes
ex: other coffee besides starbucks - Price relative to income
if PRICE and INCOME go up, what will happen to demand?
remain the same
