Learn: ECON 101 Chapter 2

Individual Demand Curve

A graph summarizing a person's buying plans and how they vary with the price.

Graphing Conventions for Demand

Price is always on the vertical axis and quantity demanded is on the horizontal axis (Ps before Qs).

Law of Demand

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

Marginal Benefit

The additional benefit you get from buying one additional item.

Marginal Principle

The principle that says you should break 'how many' questions into a series of smaller marginal choices.

Cost-Benefit Principle

The principle stating you should buy an additional unit if its benefit exceeds its cost.

Opportunity Cost Principle in Demand

Evaluating the marginal benefit of an action relative to its next best alternative ('or what?').

Rational Rule for Buyers

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

Economic Surplus

The difference between your total benefits and total costs.

Price Equals Marginal Benefit

The rule to keep buying until price equals marginal benefit to maximize economic surplus.

Demand Curve as Marginal Benefit Curve

Your individual demand curve is also your marginal benefit curve.

Diminishing Marginal Benefit

The general tendency where the marginal benefit of each additional item is smaller than the previous item.

Market Demand

The purchasing decisions of all buyers taken as a whole, calculated as the sum of quantities demanded by each person at each price.

Four-Step Recipe for Market Demand

Survey customers, add up total quantity demanded, scale up to represent the whole market, and plot the curve.

Movement Along the Demand Curve

A change in price causes a movement along a fixed demand curve, yielding a change in the quantity demanded.

Shift in the Demand Curve

Happens when factors other than price change, causing the entire demand curve to move left or right.

Normal Good

A good for which demand increases when income is higher.

Inferior Good

A good for which demand decreases when income rises.

Complementary Goods

Goods that go well together, where a higher price for one decreases the demand for the other.

Substitute Goods

Goods that replace each other, where your demand for a good increases if the price of its substitutes rises.

Expectations as a Demand Shifter

Beliefs about future prices that can shift today's demand (e.g., waiting for a sale decreases current demand).

Network Effect

When a product or service becomes more useful and yields greater marginal benefits as more people use it.

Congestion Effect

When a product or service becomes less valuable and demand declines as more people use it.

PEPTIC

Acronym for the six demand shifters: Preferences, Expectations, Prices of related goods, Type and number of buyers, Income, Congestion and network effects.

Increase in Demand

A rightward shift of the demand curve, meaning a higher quantity demanded at each and every price.

Decrease in Demand

A leftward shift of the demand curve, meaning a lower quantity demanded at each and every price.

Interdependence Principle in Demand

The principle reminding us that a buyer's best choice depends on many factors beyond price, such as income and the prices of related goods.

Market Size Factor

An increase in the number of potential buyers (through population growth, immigration, or trade) shifts the market demand curve to the right.

Role of Manager in Demand Analysis

Managers use market demand curves to forecast total sales and understand how pricing and economic conditions affect customer purchases.

Someone Else's Shoes Technique

Putting yourself in someone else's shoes to understand and predict how they will act by assuming they try to follow the Rational Rule.