Econ 101: Chapter 2 Flashcards
Individual demand curve
plots the quantity of a product that an individual will buy at each price. Summarize your buying plans and how they vary with the price.
demand curve axes
P’s before Q’s
Price on the vertical axis; quantity on the horizontal axis.
Individual demand curves are…
downward sloping.
as price gets lower, quantity demanded gets larger.
The law of demand
the tendency for the quantity demanded to be higher when the price is lower.
The rational rule for buyers
buy more of an item if the marginal benefit of one more is greater than (or equal to) the price.
price = ?? (demand curve)
price = marginal benefit. Therefore, demand curve is also the marginal benefit curve.
Diminishing marginal benefit
the marginal benefit of each additional item is smaller than the marginal benefit of the previous item (demand curve)
market demand
the purchasing decisions of all buyers taken as a whole.
market demand curve
plots the total quantity of a good demanded by the market (all potential buyers) at each price
creating a market demand curve:
- survey customers to find out how much they will buy at each price.
- add up total quantity.
- scale up.
- plot it as a curve.
Market demand curve is…
downward sloping.
A change in price can… (customers)
change who your customers are. Low prices can attract both current and new customers.
Remember this when estimating demand:
consider the demand of all POTENTIAL customers.
Change in price causes…
a movement along the demand curve, yielding a change in the quantity demanded.
change in the quantity demanded
the change in quantity associated with movement along a fixed demand curve
Shift in the demand curve
when the demand curve itself moves
since demand curve = marginal benefit curve…
any factor that changes your marginal benefits will shift your demand curve.
rightward curve shift =
increase in demand. quantity increases at each and every price.
leftward curve shift =
decrease in demand. quantity decreases at each and every price.
six factors that shift demand curves:
PEPTIC
1st factor that shifts demand curves:
preferences: when your life changes, your habits and needs may change.
2nd factor that shifts demand curves:
expectations: what you expect the price of a good to be through time can change demand.
3rd factor that shifts demand curves:
price of related goods:
- complementary and substitute goods
4th factor that shifts demand curves:
type and number of buyers: the demographics or types of buyer change MARKET DEMAND.
5th factor that shifts demand curves:
income: you only have a limited amount of income to spend
- normal and inferior goods
6th factor that shifts demand curves:
congestion and network effects
complementary goods
goods that go ‘well together’.
- when the higher price of one good decreases your demand for another good
substitute goods
goods that can replace one another.
- When the demand for any good increases if the price of its substitutes rises.
normal goods
when your demand for a good increases when your income is higher.
inferior goods
Goods when you’re ‘making do’. when demand increases when income decreases.
network effect
a product or service becomes more useful to you as more people use it.
- more useful = greater marginal benefit = greater demand
congestion effect
products that become less valuable when more people use them.
“holding other things constant”
noting your conclusions may change if some factor that you haven’t analyzed changes.
