Class1:WTP & Consumer Surplus / Diminishing Marginal Utility / Demand Curve Moves / Price Elasticity

Question 1

How is “Consumer Surplus” calculated?

Answer 1

Willingness to Pay - Price of good sold

Question 2

What is another way to think about WTP. from the customer perspective?

Answer 2

The utility they get from the service or product

Question 3

What is the term for when a person values something less (or enjoys it less) as they get more of it?

Answer 3

“Diminishing Marginal Utility”

Question 4

Why are companies willing to seel you more stuff after initial purchase, for less money?

Answer 4

Due to diminishing marginal utility. You value those less, ,TV’s “extra premium channels at a discounted price”

Question 5

What are the 6 variables of a market demand curve (Q)? and how is each correlated to the Demand?

Answer 5

3P.I.N.U 1. Price (-) 2. P.Substitute (+) 3. P.Complement (-) 4. Income(+) 5. Total Buyers [N] (+) 6.Utility (tastes) (+/-)

Question 6

What does the “Law of Demand” say?

Answer 6

There is an inverse (negative) relationship between price and quantity demanded

Question 7

Of the 6 varibles in market-demand function, which shift the curve rather than just a move along the curve?

Answer 7

All shift the curve except a change in price alone

Question 8

What happens to the curve when: - Substitute price goes up?

Answer 8

shiftt out

Question 9

What happens to the curve when: - Complement price goes up?

Answer 9

shifts in

Question 10

What happens to the curve when: - income goes up?

Answer 10

shifts out

Question 11

What happens to the curve when: - Numbers goes up?

Answer 11

shifts out

Question 12

What happens to the curve when: - utility goes up?

Answer 12

shifts out

Question 13

How to construt the demand curve from info by each individual?

Answer 13

Simply add willingness of tatall q purchase for each price point.

Question 14

Contrast the Demand Curve with the Inverse demand curve.

Answer 14

Demand Curve = Read horizontally, to be able to add the Qs of individuals and have the market demand, see pic. The formula is Q as a function of P (Q=12-2*P)

Inverse Demand Curve = Read vertically, for Q then P. The formula is P as a function of Q (P=6.5-0.5*Q)

Question 15

Whats is the equation of linear demand? and it’s inverse?

Answer 15

Question 16

What is the aggregate consumer surplus in market?

Answer 16

It is the sum of all the consumer surplus of all the buyers in the market. Measured by the area below the demand (max WTP) and above the price line.

Remember that consumer surplus is WTP - The paid amount

, but in this case, it is for the aggregate market.

In the image, consumers are paying, $20, so the aggregate surplus is in blue.

Question 17

What is the price elasticity of demand? flat vs. steep curve?

Answer 17

The % change in quantity demanded relative to the percentage change in price. Flat ciurve is very elastic, steep curve not so much.

Question 18

How is price elasticity calculated WHEN DEMAND IS LINER and outputs interpreted?

Answer 18

• >1 Elastic
• <1 inelastic
• = 1 uni-elastic

Question 19

What goods would be highly elastic?

Answer 19

Those that have many substitutes

Question 20

How is the two-point elasticty formual calculated? when would this be used?

Answer 20

Used when only have two points in the demand curve and used the mid-point because % change when going up is different from when it goes down.

Question 21

Contrast the regular point elasticity formula to the two-point formula.

Answer 21

• Two-point formula: Only provides a rough estimate of the elasticity, the larger the changes in P and Q, the lower the quality of the estimate
• Point elasticity formula: Good for small changes in price

Question 22

Economist can use the concept of elasticity with any of the sisters in the function (Substitute, complement, income, etc.)

What would income elasticity and corss-price elasticity look like?

Answer 22