CH 2: Demand and Consumer Choice

Individual Demand

What you want, at Each Price

Demand

We are examining buying decisions (as opposed to selling decisions)

Curve

We are graphing things (sometimes these curves are straight lines)

Law of Demand

he tendency for quantity demanded to by higher when the price is lower

The Rational Rule for the Buyer

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price

Diminishing marginal benefit

Each additional item yields a smaller marginal benefit than the previous item

Market demand curve

A graph plotting the total quantity of an item demanded by the entire market, at each price

Change in price

causes a movement along the demand curve, yielding a change in the quantity demanded

Movement along the demand curve

A price change causes a movement from one point on a fixed demand curve to another point on the same demand curve

Change in the quantity demanded

The change in quantity associated with movement along a fixed demand curve

Shift in the demand curve

a movement of the demand curve itself

Increase in demand

a shift of the demand curve to the right

Decrease in demand

a shift of the demand curve to the left

The six factors that shift the market demand curve

Income, Preferences, Prices of related goods, Expectations, Congestion and network effects, The type and number of buyers, ... but not a change in price

Normal Good

A good for which higher income causes an increase in demand (If you will buy more after getting richer, then the item is a normal good)

Inferior Good

A good for which higher income causes a decrease in demand. (goods you buy less of when your income is higher)

Complementary Goods

Goods that go well together. Your demand for a good, will decrease if the price of a complementary good rises

Substitute Goods

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls.

Network Effect

When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase.

Congestion Effect

When a good becomes less valuable because other people use it. If more people buy such a produce, your demand for it will decrease

Number of Buyer

An increase in the population over time can increase the demand for goods and services, shifting the demand curve to the right