Chapter 2: Demand and Consumer Choice

Individual demand curve

A graph, plotting the quantity of an item that someone plans to buy, at each price.

“Holding other things constant”

A commonly used qualifier noting your conclusions may change if some factor that you haven’t analyzed changes. (In Latin, it’s ceteris paribus.)

Law of demand

The tendency for quantity demanded to be higher when the price is lower.

Rational Rule for Buyers

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

Diminishing marginal benefit

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

Market demand curve

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

Market demand curve - four step recipe

1. Survey your customers, asking each person the quantity they will buy at each price.

2. For each price, add up the total quantity demanded by your customers.

3. Scale up the quantities demanded by the survey respondents so that they represent the whole market.

4. Plot the total quantity demanded by the market at each price to draw the market demand curve.

Movement along the demand curve

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

Factors that shift the demand curve (PEPTIC)

Preferences

Expectations

Prices of related goods

Type and number of buyers

Income

Congestion and network effects

Normal good

A good for which higher income causes an increase in demand.

Inferior good

A good for which higher income causes a decrease in demand.

Complementary goods

Goods that go 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 product, your demand for it will decrease.