Demand Flashcards
What is marginal utility?
Measurement of how much satisfaction a consumer gets from consuming the next unit. It tends to decrease with consumption, may or may not reach zero depending on the good.
For what is marginal utility used?
Used by economist to determine how much of an item consumers are willing to purchase.
Types of marginal utility
Positive
Zero
Negative
What is positive marginal utility?
Is when having more of an item brings additional happiness.
Ex. Cake: one slice is fine, but two slices would bring you some extra joy.
What is zero marginal utility?
When consuming mora of an item brings not extra measures of satisfaction.
Ex. Cake: Feel fairly full after two slices, wouldn’t really feel better after having a third slice.
What is negative marginal utility?
Is when having too much of an item, so consuming more is even harmful.
Ex. Cake: the fourth slice of cake might even make you sick
Definition Demand
Amount of a good or service that a consumer is willing and able to buy at various prices during a given period of time
What is the law of demand?
An increase in a goods price results in a decrease in the quantity demanded.
A decrease in the goods price results in an increase in quantity demanded.
Normal goods follow the law of demand.
Exception: products where demand may actually increase with an increase in supply. (Luxury Goods, snob appeal.)
What are the non price determinants of demand?
When there are changes in the pattern of demand, even if there is no change in the price.
- Increase in disposable income
- Change in the price of complementary goods
- Substitute goods
- Diminishing marginal utility
- Sudden changes in consumers preferences
- Increase in the size of a market
- Changes in consumer’s expectations
- A successful advertising campaign
Increase in disposable income
will change the demand
- consumers have more money to spend
- decrease in taxes (people will buy more at the same price)
Changes in the price of complementary goods
–> goods that go with each other
for example: pretzels and butter
Consumer buys more of a product, when the price for its complement decreases.
Substitute goods (demand changes)
- Goods that can easily substitute or change for each other
Ex. an increase in the price of take- away pizza might lead to an increase in demand for frozen pizza
Diminishing marginal utility (demand changes)
As more units of a product are consumed, the value of the next, additional unit decreases.
Sudden changes in consumers preferences (demand changes)
ex. sudden rise in the popularity of pizza, peope will demand more, even if the price stays the same.
Increase in the size of a market (demand changes)
–> will increase demand
ex. the teen population increases, more iphones are being demanded, even of the price did not changed
Change in consumers expectations (demand changes)
Ex. a worker expects the economy to be bad and get fired in the futur, so may be doesnt buy new toys fo his children.
A successful advertising campaign (demand changes)
Can change demand for a product, even if there is no change in the price.
What does Elasticity of demand measures?
Measures how responsive quantity demanded is to a change in price.
Why is it important to know the elasticity of the demand for a product?
Important to know because it allows businesses to set pricing in ways that maximize profit.
What is elastic demand?
When a small change in price causes a major change in demand. 1 < PED < infinity (Bigger than one)
What is inelastic demand?
When a large change in price does NOT cause a major change in quantity demanded.
0 < PED < 1 (Bigger than zero, but smaller than 1)
How is PED (Elasticity of demand) calculated?
PED = %change of quanity demanded/ %change in price
What are the determinants of price Elasticity of Demand?
- Number & closeness of substitutes ( When there are many different brands, demand is elastic and when there is only one brand producing the product, demand is inelastic.)
- The necessity of the product (Ex. food is neccessary, so it is inelastic)
- The proportion of the income spent on the good (Ex. Good costs very little, it only takes a small part of the budget, therefore demand will be quite inelastic)
- The time period considered
It takes time for consumers to change their buying and consumption habits
–> shirt term: inelastic
–> long term: elastic
What does Income Elasticity measures?
Measures how much the demand for a produt changes, when there is a change in the consumer´s income
