Theme 2 - Demand Flashcards
What is a consumer’s individual demand for a good?
It’s the relationship between the price and the quantity she is willing and able to buy at that price (quantity demanded).
What does the consumer’s demand curve coincides with?
Because an individual will choose q such that MV(q)=P the consumer’s demand curve coincides with his or her marginal valuation curve.
What is the definition of the consumer surplus?
The CS is the difference between the maximum amount of money a consumer is willing to pay and the price paid, summed on all units purchased
What is the market demand curve?
The market demand curve or the demand for a population is obtained by adding, for any given price P, the quantities demanded by all consumers at that price. (WE ADD UP QUANTITIES NOT PRICES)
What are the factors affecting demand and how do they affect the demand curve?
Price of the good (change along the demand curve)
Other factors (shift of the demand curve) such as:
- Price of other goods (substitutes and complements)
- Household income (normal and inferior goods)
- Other factors (seasonal factors, government regulations, tastes/trends, expectations)
What is elasticity?
An elasticity is a number representing the sensitivity of one variable to changes in another variable.
It expresses the percentage change in the former variable in response to a 1% increase in the latter.
Describe the values of Ep along the demand curve
Ep = 0 : perfectly inelastic
-1 < Ep < 0 : relatively inelastic
Ep = -1 : unit elastic
-∞ < Ep < -1 : relatively elastic
Ep = -∞ : perfectly elastic
How do you compute the price elasticity of demand, the income elasticity of demand and the cross-price elasticity of demand?
Ep= (∆Qx)/(∆Px ) x Px/Qx
(∆Qx)/(∆Px ) corresponds to the coefficient before Px
Ei = (∆Qx)/(∆I) x I/Qx
(∆Qx)/(∆I) corresponds to the coefficient before I
Ecxy = =(∆Qx)/(∆Py) x Py/Qx
(∆Qx)/(∆Py) corresponds to the coefficient before Py
