Demand - Week 3

Individual Demand

The quantity of a good or service that an individual plans to buy at each possible price

Individual Demand Curve

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

Ceteris Paribus

Holding all else constant meaning everything besides price that could change demand remains unchanged resulting in a downward sloping curve

Law of Demand

The relationship between quantity demanded and price where quantity demanded increases as price decreases (and vice versa)

Decisions and the Demand Curve

When choosing how much to buy think of marginal benefits and apply core economic principles to buying

Rational Rule for Buyers

Buy more of an item if the marginal benefit of one more unit is greater than or equal to the price (MB >= Price)

Core Principles in Rational Rule for Buyers

Incorporates the interdependence principle marginal principle and cost-benefit principle to maximize economic surplus

Demand Curve as Marginal Benefit Curve

The demand curve is the marginal benefit curve and directly reveals marginal benefits at each quantity

Diminishing Marginal Benefit

The reason the demand curve slopes downward because the marginal benefit of each additional item is smaller than the previous one

Market

Any physical or non-physical situation that brings together buyers and sellers to exchange goods and services

Market Demand

The sum of the quantity demanded by each person in a market calculated by horizontal summation and usually scaled up from a survey

Market Demand Slope & Price Effects

Slopes downward following the law of demand where price changes alter demand for both new and existing customers

Movements Along Demand Curve

Caused solely by a change in the price of the good itself resulting in a change in quantity demanded

Perfectly Competitive Markets

Markets with many buyers and sellers identical goods free entry and exit where no individual can influence price so everyone takes price as given

Firm Decision in Perfectly Competitive Markets

Since prices are taken as given the only decision a firm makes is how much output to make

Demand Curve Shifters

Shifts occur when factors beyond a price change alter demand leading to a rightward shift (increase in demand) or leftward shift (decrease in demand)

Income & Normal Goods

A good where demand increases when income rises and demand decreases when income falls (positive income coefficient)

Income & Inferior Goods

A good where demand decreases when income rises and demand increases when income falls (negative income coefficient)

Prices of Related Goods - Complementary Goods

Goods used together where a higher price for one decreases demand for the other having a negative coefficient (c < 0)

Prices of Related Goods - Substitute Goods

Goods used in place of one another where a higher price for one increases demand for the other having a positive coefficient (c > 0)

Expectations as a Demand Shifter

Choices are linked through time where expecting high prices to persist will make you abstain from buying or alter current purchases

Network Effects

Goods that become more useful as more people use them shifting demand rightward as the user base expands

Congestion Effects

Goods that become less useful as more people use them shifting demand leftward as usage grows

Type and Number of Buyers

Applies only to market demand where more buyers shift demand rightward and changes in buyer type alter quantities demanded

Movement Along vs Shift Rule

A change in the price of the good itself causes a movement along the curve while a change in non-price factors that alters survey responses at each price causes a shift