TN #1- Demand Curves Flashcards
“In a competitive market, prices are determined more by _____ than _____”
“In a competitive market, prices are determined more by costs than what people are willing to pay”
What does “maximum willingness to pay” or “willingness to pay” refer to? or (WTP)
the highest amount of $ someone or a group is willing to pay for an item.
What does a demand curve represent?
the relationship between the price charged and the quantity demanded
what does the function of a demand curve look like? Why?
Demand is a downward-sloping function of price because there is variation among potential customers in the most they are willing to pay.
A demand curve represents ________?
A demand curve represents the distribution of the willingness to pay (WTP).
What is a demand model?
an equation that relates the quantity demanded to the price charged and that this equation represents the distribution of the willingness to pay for the good.
Model=
model=equation
Why do businesses need models?
1) forcasting 2) decision support
The relationship between quantity and price are FIXED once a company makes a decision-they cannot be independent of one another…why?
The price it charges will determine the quantity
demanded and therefore the quantity it needs to produce. To view the same point from a different
perspective, once it chooses how many Accords to produce, it must choose a price that generates
demand for that quantity.
What additional info do you need in order to answer the question “how many accords should Honda Produce?”
You must ALSO understand what Honda’s objective is. (example- to maximize market share, maximize revenue, maximize growth, etc.)
What assumptions will ECON operate within in terms of what a company’s economic objectives are?
We will assume the objective is to maximize profits.
profits=
revenue-costs
What are the three methods of finding where a company can maximize profits?
1) enumeration (inefficient)
2) Intelligent manual search or “hill climbing” (inefficient)
3)
marginal revenue
the incremental revenue per unit of selling X number of units at Y price.
If the incremental revenue per unit exceeds the incremental cost per unit, then how can the firm act in response?
They can increase output to maximize profits.
