Chapter 2 – Demand and Consumer Choice

Vocabulary flashcards covering the main concepts of Chapter 2: demand, individual and market demand curves, the law of demand, marginal analysis, demand shifters, and related economic principles.

Demand

The quantity of a good an individual will buy at various prices in a given time, provided they desire it, are willing to pay, and have the ability to pay.

Individual Demand Curve

A graph showing the quantities a single person plans to purchase at each price, holding all other factors constant (ceteris paribus).

Market Demand Curve

A graph plotting the total quantity demanded by all buyers in the market at each price; built by horizontally summing individual demand curves.

Law of Demand

The tendency for quantity demanded to rise when price falls and to fall when price rises, yielding a downward-sloping demand curve.

Ceteris Paribus

Latin for “holding other things constant”; used when analyzing how quantity demanded responds solely to price changes.

Rational Rule for Buyers

Purchase more of an item if its marginal benefit is greater than or equal to the price; stop when Price = Marginal Benefit.

Marginal Benefit

The additional benefit gained from consuming one more unit of a good.

Diminishing Marginal Benefit

The principle that each additional unit of a good yields a smaller marginal benefit than the previous one, causing willingness-to-pay to decline.

Normal Good

A good for which higher income increases demand (e.g., restaurant meals, smartphones).

Inferior Good

A good for which higher income decreases demand (e.g., generic instant noodles, bus rides for some consumers).

Complementary Goods

Goods that are consumed together; a price rise in one lowers demand for the other (e.g., peanut butter and jelly).

Substitute Goods

Goods that can replace each other; a price rise in one raises demand for the other (e.g., Coke vs. Pepsi).

Expectations (Demand Shifter)

Beliefs about future prices or availability that alter current demand (e.g., buying gas before a announced price hike).

Income (Demand Shifter)

Changes in buyers’ income that shift demand rightward for normal goods and leftward for inferior goods.

Preferences (Demand Shifter)

Tastes, fads, seasons, or lifestyle changes that increase or decrease demand at every price.

Demand Shift

A rightward or leftward movement of the entire demand curve caused by non-price factors, changing quantity demanded at every price.

Movement Along Demand Curve

A change in quantity demanded resulting solely from a change in the good’s own price.

Interdependence Principle

The concept that best choices depend on other choices and factors; changes in related variables can shift demand.

Network Effect

When a good becomes more valuable as more people use it, increasing individual demand (e.g., social media platforms).

Congestion Effect

When a good becomes less valuable as more people use it, decreasing individual demand (e.g., crowded roads).

Type and Number of Buyers

Demographic changes or population growth that shift market demand by altering the pool of consumers.

Four-Step Process to Estimate Market Demand

Survey potential buyers, add quantities at each price, scale to the full market, and plot the total quantities to obtain the market demand curve.

Marginal Principle

Analyze decisions in small increments: evaluate whether the benefit of ‘one more’ unit exceeds its cost.

Cost-Benefit Principle

Choose an action when its benefits outweigh its costs, a rule applied at each marginal decision point.

Opportunity Cost Principle

Evaluate the value of the next-best alternative forgone when measuring marginal benefit or cost.

Components of Demand

Desire for the product, willingness to pay the price, and ability (financial means) to pay.