econChap2 Flashcards
What is an individual demand curve?
A graph that summarizes the quantity an individual plans to buy at each price, typically downward-sloping.
Where are price and quantity plotted on a demand curve?
Price is plotted on the vertical axis, and quantity demanded is plotted on the horizontal axis.
What does a downward-sloping demand curve indicate?
It indicates that as the price decreases, the quantity demanded increases, and vice versa.
What is the Law of Demand?
The law of demand states that the quantity demanded of a good is inversely related to its price, holding other factors constant.
How can you discover your individual demand curve?
By surveying how much of a good you would buy at different prices and plotting these quantities against the prices.
What is marginal benefit?
The additional benefit received from consuming one more unit of a good or service.
What is the Rational Rule for Buyers?
Buy more of an item if the marginal benefit of one more unit is greater than or equal to the price.
Why is the individual demand curve also your marginal benefit curve?
Because it plots the maximum price you are willing to pay for each additional unit, reflecting your marginal benefits.
What causes the individual demand curve to be downward-sloping?
Diminishing marginal benefits, meaning each additional unit provides less benefit than the previous one.
What is the marginal benefit of the first litre of gas in Darren’s example?
$1.80 per day.
What decision should Darren make when the price of gas is $1.39 per litre?
He should buy three litres of gas per day, as the marginal benefits of the first three litres exceed the price.
What is market demand?
The total quantity of a good demanded by all consumers in the market at each price.
How is market demand calculated?
By summing the quantity demanded by each individual consumer at each price level.
What does a rightward shift in the demand curve signify?
An increase in demand, meaning at every price, a larger quantity is demanded.
What does a leftward shift in the demand curve signify?
A decrease in demand, meaning at every price, a smaller quantity is demanded.
What are the six factors that shift the demand curve, remembered by the acronym PEPTIC?
Preferences, Expectations, Prices of related goods, Type and number of buyers, Income, Congestion and network effects.
How does an increase in income affect the demand for normal and inferior goods?
It increases demand for normal goods and decreases demand for inferior goods.
What is a substitute good?
A good that can replace another in consumption, where an increase in the price of one increases the demand for the other.
What is a complementary good?
A good that is consumed together with another, where an increase in the price of one decreases the demand for the other.
How do expectations about future prices affect current demand?
If prices are expected to rise, current demand increases; if prices are expected to fall, current demand decreases.
What are network effects?
When the value of a product increases as more people use it, leading to increased demand.
What are congestion effects?
When the value of a product decreases as more people use it, leading to decreased demand.
How does the number of buyers in a market affect market demand?
An increase in the number of buyers shifts the market demand curve to the right, while a decrease shifts it to the left.
What is the ‘framing effect’ in demand?
When the way choices are presented affects decisions, potentially causing inconsistent choices based on presentation rather than actual costs and benefits.
What is the difference between a movement along the demand curve and a shift in the demand curve?
A movement along the curve is caused by a change in price, while a shift is caused by changes in other factors like income or preferences.
What principle explains why people buy more of a good when its price decreases?
The Law of Demand.
What role does the interdependence principle play in shifting demand curves?
It highlights that changes in other choices, markets, or expectations can shift the demand curve.
How did COVID-19 affect the demand for gasoline and e-commerce?
Demand for gasoline decreased due to fewer travels, while demand for e-commerce increased as more people stayed home.
What is the impact of a rightward shift in the demand curve on equilibrium price and quantity?
Both equilibrium price and quantity increase.
What is the impact of a leftward shift in the demand curve on equilibrium price and quantity?
Both equilibrium price and quantity decrease.
Why might an individual’s demand curve shift to the right?
Due to an increase in income, a change in preferences favoring the good, a decrease in the price of a complementary good, positive expectations, network effects, or an increase in the number of buyers.
Why might an individual’s demand curve shift to the left?
Due to a decrease in income, a change in preferences against the good, an increase in the price of a complementary good, negative expectations, congestion effects, or a decrease in the number of buyers.
What is an example of a normal good from Darren’s perspective?
Gasoline, as Darren’s demand increases with higher marginal benefits.
What is an example of a substitute good?
Driving versus taking the bus; if bus prices increase, demand for driving (gasoline) may increase.
How can advertising influence demand?
By changing consumer preferences to increase demand for advertised products.
What is the effect of network effects on market demand?
They can increase demand as more people use the product, making it more valuable.
What is the effect of congestion effects on market demand?
They can decrease demand as the product becomes less valuable when more people use it.
How does the type and number of buyers affect market demand?
An increase in the number or diversity of buyers shifts the market demand curve to the right.
What is the ‘someone else’s shoes’ technique?
A method to predict others’ decisions by imagining yourself in their situation and applying economic principles.
How do sunk costs relate to demand decisions?
Sunk costs are irrelevant to current demand decisions as they cannot be recovered.
Why is it important to consider all six PEPTIC factors when analyzing demand?
Because each factor can independently shift the demand curve, affecting overall market demand.
What lesson can managers learn from understanding individual and market demand curves?
That they can forecast sales and adjust strategies based on how changes in price and other factors affect overall market demand.
How do expectations about future prices create substitute goods?
If consumers expect prices to rise in the future, they may substitute current purchases for future ones, increasing current demand.
Why do market demand curves tend to be downward-sloping like individual demand curves?
Because the aggregation of individual demands, all of which are downward-sloping, results in a market demand curve that is also downward-sloping.