Module 1 Flashcards
___________ is the maximum amount of money a customer is willing to pay for a product or service.
Willingness to Pay (WTP)
WTP is not the same as ______.
Price. A product may have a price of $0, but there may still be consumers who are willing to pay a lot for it. If the price of a product is higher than a consumer’s WTP, that consumer will not purchase the product.
Differences in consumer WTP that arise from differences in, say, age, gender, income, or education are what we call ________ or ________ differences.
“extrinsic” or “observable”
Other differences are ________ —things that you couldn’t know about a person without asking him or her.
“intrinsic”
A demand curve for an _____________ simply summarizes that consumer’s willingness to pay for various quantities of a product.
Individual Buyer
The convention for graphing demand curves is to represent _______on the y-axis, and _______ on the x-axis.
Price; Quantity Demanded
Demand curves are convenient representations because one can easily see how a firm’s ________ correspond to
different prices.
Revenues
A firm’s revenue is given by _________ (equation) or the area under a demand curve.
Price x Quantity Demanded = Revenues
An individual’s demand curve is typically _______ sloping.
Downward
A consumer will have a ______ WTP for the first
unit of a product, but a _______ WTP for subsequent units.
Higher; Lower
When a factor that affects people’s WTP changes, the demand curve will ___________ in response.
Shift (left or right). Because now, at any given price the number of people with a WTP equal to that price will be different (higher or lower, depending on the event).
_______ is not a factor that shifts the demand curve.
Price. By convention, price is on the y-axis of any demand curve. So a change in price will move us up or down along the existing demand curve but it will not shift the curve.
Price affects _________, but doesn’t change the underlying WTP or demand.
quantity demanded
What are three other phrases for saying the demand curve “shifted left?”
“shifted down, “shifted in,” or “demand has decreased”
What factors determine whether the demand curve for a product is steep or flat?
Close Substitutes, Necessity/Luxury, and Time Horizon
Why would a demand curve be so steep that it is perfectly vertical?
Here customers will buy a given quantity no matter what the price. One example that comes close to this case is the demand for insulin by diabetics.
Why would a demand curve be flat?
Because a small increase in price would drive all customers away. A classic example is demand for paper currency. If someone tried to sell us a $20 bill for anything more than $20 worth of value, we would take our business elsewhere.
Steep demand curves are ______.
“Inelastic”
Flat demand curves are ______.
“Elastic”
The market demand curve reports, at any given price, the ________ quantity demanded.
Aggregate
Market demand curves are downward sloping because _____ consumers are willing to purchase the product at higher prices.
Fewer
What causes the demand curve to shift?
Changes in consumer’s WTP
An increase in a consumer’s WTP for a product will shift her demand curve _______.
Outward
A decrease in WTP will shift her demand curve _______.
Inward
Changes in price correspond to _______ the demand curve.
Movements Along
Non-price factors that affect WTP correspond to _______ the demand curve.
Shifts (inward or outward)
Factors that shift _______ demand curves up or down also shift the ________ demand curve.
Individual; Market
The _____ of a market demand curve measures how responsive buyers are to changes in price.
Slope
When the curve is flat or near-flat, a small-dip in price sparks a ______ in the quantity demanded.
Large Surge
When the curve is steep or vertical, changes in price have __________ on the quantity demanded.
Little Impact
Steep curves are often called _______, and flat curves
are often called _______.
Inelastic; Elastic
Demand is typically ____ elastic if a product is a luxury rather than a necessity, or if the product has many substitutes.
More
The ________ of demand is calculated as the percentage change in quantity demanded divided by the
percentage change in price.
“Price Elasticity”
The important advantage of the elasticity measure over a slope measure is…
Elasticity is a unit-less measure. It doesn’t change as the units used to measure quantity demanded change.
One can easily ______ the elasticities of demand for different products.
Compare
Elasticity is _______ at each point on a demand curve with constant slope (i.e., a straight-line demand curve).
Different
The __________ of demand measures how sensitive quantity demanded is to a change in
consumers’ income.
Income Elasticity
________ —setting prices based on WTP rather than (just) costs is an important one.
“value-based pricing”
If demand is inelastic, it pays to _____ prices.
Raise
If demand is elastic, it pays to ______ prices.
Lower
For a company facing a linear demand curve, revenue is maximized:
midway down the demand curve. Revenue is maximized midway down the demand curve, where elasticity equals 1.
