Chapter 2 - Demand (Econ 101) Flashcards

A comprehensive set of practice flashcards covering key concepts from Chapter 2: Demand, individual vs market demand, marginal benefits, and demand shifters.

What is the Individual Demand Curve?

A graph that plots the quantity of an item an individual plans to purchase at each price.

What does 'ceteris paribus' mean?

Holding other things constant; all else equal when analyzing demand.

What does drawing an individual’s demand curve represent?

That person’s buying plans given current economic conditions; if something important changes, the curve would shift.

What is the Law of Demand?

The tendency for the quantity demanded to be higher when the price is lower, holding other factors constant.

What is the Marginal Principle in decision making?

Break down the question of how many units to buy into a series of smaller marginal choices.

What is the Cost-Benefit Principle?

For each marginal choice, buy the additional unit if the benefits exceed the costs.

What is the Rational Rule for Buyers?

Buy more of an item if the marginal benefit of one more is greater than or equal to the price; keep buying until price equals marginal benefit.

What is Marginal Benefit in relation to the demand curve?

Your demand curve is also your marginal benefit curve; willingness to pay equals marginal benefit.

What does diminishing marginal benefit mean?

Each additional unit yields a smaller marginal benefit than the previous one.

What is the Market Demand Curve?

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

How is market demand estimated?

Survey individuals, sum quantities at each price, scale up to represent the whole market, and plot total quantity demanded.

Why is the market demand curve downward-sloping?

Because the Law of Demand: the total quantity demanded is higher when the price is lower.

What does 'Movement along' the market demand curve mean?

A change in quantity demanded caused by a change in price, holding other factors constant.

What are Demand Shifters?

Factors other than price that shift the demand curve: income, preferences, price of related goods, expectations, congestion and network effects, and number of buyers.

How does income affect demand for normal vs inferior goods?

Normal goods: demand increases with income; inferior goods: demand decreases with income.

What is the difference between substitutes and complements with examples?

Substitutes: an increase in the price of one increases demand for the other (e.g., pizza and hamburgers). Complements: an increase in the price of one decreases demand for the other (e.g., printers and printer ink).

How do preferences shift demand?

Anything that increases desire for a good shifts its demand curve to the right; examples include life events, marketing trends, and seasonality.

How do expectations affect demand?

If people expect income to rise, they may buy more now; if the economy sours, demand for big-ticket items may fall now.

What are Network Effects?

When a good becomes more useful as more people use it; demand for the good can rise with adoption (e.g., social platforms).

What are Congestion Effects?

When a good becomes less valuable as more people use it; increased usage can reduce demand for that alternative path/good due to congestion.

How does Number of Buyers affect market demand?

A larger population or more buyers shifts market demand to the right; international trade can also add buyers (e.g., 1 billion new consumers).

What is the four-step process to estimate market demand?

1) Survey quantities at each price; 2) sum quantities at each price; 3) scale up to represent the whole market; 4) plot total quantity demanded at each price.

List the six Demand Shifters discussed.

Income, Preferences, Price of Related Goods, Expectations, Congestion/Network Effects, Number of Buyers.

If the price of a complementary good falls, what happens to demand for the other good?

Demand for the other good increases (shifts right).

What is the difference between shifts and movements in demand?

Movements along the curve are caused by price changes; shifts occur when a non-price factor changes, moving the entire curve to the right or left.

What happens to demand when income increases for a normal good?

Demand increases; the curve shifts to the right.

What happens to demand when income increases for an inferior good?

Demand decreases; the curve shifts to the left.

Are substitutes or complements more likely to cause a demand shift when the price of one changes?

Substitutes: a rise in the price of one increases demand for the other; Complements: a rise in the price of one lowers demand for the other.

What is a Normal Good?

A good for which demand increases as income rises.

What is an Inferior Good?

A good for which demand decreases as income rises.