Understanding Demand and Demand Elasticities Flashcards
What does DEMAND arise from?
Demand arises from a consumer, facing a set of prices for different good and a given income level, choosing his/her consumption levels to maximize his/her happiness.
How do we calculate TB (Total Benefit)?
TB (Q) = 10Q - 2Qº
What does TB capture? (Focusing on a sing product, suppose a consumer derives a value TB(Q) = 10Q - 2Qº from consuming Q cups of coffee.
This total benefit captures the dollar value that the consumer places on consuming those Q cups of coffee.
Is the consumption of other good subsumed in the total benefit function?
Yes.
If a consumer places a value of 10 * 2 - 2 * 2º = $12 on two cups of coffee, then what does the consumer forgo?
Paying $12 for 2 cups of coffee means that the consumer foregoes $12 of consumption on other goods. In other words the opportunity cost of drinking coffee is the foregone consumption of other goods.
What will the TB be equal to when the consumer forgoes the consumption of other goods?
The total benefit will be equal to the maximum that the consumer would be willing to pay for these goods.
What does total willingness to pay measure?
It measures the maximum amount of $ that a given consumer would be willing to pay for any particular bundle of goods.
If the consumer values 2 cups of coffee at $12 and we offer him/her the choice between drinking 2 cups of coffee or not drinking coffee at all, how would the consumer feel?
The consumer would be indifferent between these two alternative because he/she could spent $12 on consuming something else, or consume 2 cups of coffee which he/she values at exactly $12.
If the consumer values 2 cups of coffee at $12 and we offer him/her coffee at $13, what would the consumer do
The consumer would rather forego the coffee and buy something else instead.
If the consumer values 2 cups of coffee at $12 and we offer him/her coffee at $11, what would the consumer do
The consumer would strictly prefer purchasing coffee. Then, he/she would be left with $1 to spend on other goods.
What is consumer surplus?
The additional amount of money left to spend on other goods if the price of a good is less than the price the consumer values a good to be. In the case of $11 cup of coffee where the consumer values the coffee to cost $12, there is a $1 consumer surplus after purchasing the $11 coffee.
I.E., Total willingness to pay - price paid = consumer surplus.
How do we measure consumer surplus?
The difference between the total willingness to pay and the actual price paid.
What does consumer surplus give us the amount for?
How much better off the consumer is as a result of his/her consumption choice, given the prevailing prices.
What is the algorithm for TC(Q) - total cost consumption?
TC(Q) = P * Q (the market price of the goods times the number of units purchased)
When dealing with market prices, what is the optimal choice characterized by?
MB(Q) = MC(Q) - Marginal benefit of consumption equal to marginal cost of consumption.
