Week 2 - Demand Flashcards
Define marginal benefit
The marginal benefit of an additional good is the maximum a consumer is willing to pay for the additional unit
Explain the concept of diminishing returns
It is assumed that there are diminishing returns (benefit decreases with quantity) as you get less utility from you 100th bottle of water.
At what point will consumer stop buying?
An individual will buy all unity up to the point where their marginal benefit = the price.
What is the Marshallian Graphing Convention?
Price is put in the y axis rather than the x axis. This means you are actually drawing inverse curves
Q = a - bP is P = a/b - 1/b Q
What is total benefit?
Total benefit is the marginal benefit at each price below the equilibrium. It is the area under the curve.
Define consumer surplus
A measure of how much a consumer values being allowed to purchase those units. It is the amount they are willing to pay - the amount to actually pay
Formula for consumer surplus
CS = Total benefit - expenditure or the area between price and the demand curve
Define net gain
Net gain is the same as consumer surplus
What does Ceteris Paribus means?
All else being equal
What is a normal good
A normal good is a good where increasing income lead to increased demand
What is an inferior good
A good where increasing income leads to falling demand
What are substitutes?
Two goods where a decrease in the price of one will lead to a decrease in demand for the other e.e coke and pepsi
What are complements
Two goods where increasing price for one leads to a decrease in demand for both (e.g x box and x box games)
Define elasticity
Elasticity is the measure of the responsiveness of demand to changes in price.
Formula for elesticity
% change in quantity/ % chane in price
= (change in q / change in p) * (P mid point/ q mid point)
