Economic Theory - Demand Analysis I

Flashcards on Demand Analysis I

Utility

Satisfaction a consumer gets from goods/services.

Marginal Utility

Extra satisfaction from an extra unit of a good.

Law of Diminishing Marginal Utility

The satisfaction from a product decreases as consumption increases. As a person consumes more units of a good or service, the additional satisfaction (utility) gained from consuming each extra unit decreases.

Law of Equi-Marginal Utility

Maximizing satisfaction by equating marginal utility per dollar across goods.

Form Utility

Utility created by product design and development.

Place Utility

Utility from easy access to goods/services.

Time Utility

Utility from availability of goods/services when needed.

Possession Utility

Utility from the benefits of owning a product/service.

Demand

Willingness to purchase products at different prices.

Law of Demand

Inverse relationship between price and quantity demanded.

Speculation

Goods where demand increases with price due to expected future price increases.

Status Goods/Veblen Goods

Goods bought to display status; demand increases with price.

Giffen Goods

Inferior goods where demand increases with price.

Income Effect

Increased purchasing power due to lower prices.

Substitution Effect

Switching to cheaper substitutes when a price falls.

Elasticity

Change in one variable relative to a change in another.

Price Elasticity of Demand

Responsiveness of quantity demanded to a change in price.

Relatively Elastic Demand

Demand changes more than proportionally to price changes. percentage change in quantity demanded is greater than the percentage change in price. When the price of a product changes a little, the amount people buy changes a lot.

Relatively Inelastic Demand

Demand changes less than proportionally to price changes: a situation where the percentage change in quantity demanded of a good or service is smaller than the percentage change in its price. When the price of a product goes up or down, the quantity people buy doesn’t change much.

Unitary Elastic Demand

Demand changes proportionally to price changes.

Income Elasticity of Demand

Relationship between consumer income and demand.

Positive Income Elasticity of Demand

Demand increases with income.

Negative Income Elasticity of Demand

Demand decreases with income.

Zero Income Elasticity of Demand

Income change has no effect on demand. A situation that when consumers’ income changes, the quantity demanded of a good stays the same.Simple words: No matter how much your income increases or decreases, you still buy the same amount of the good.

Cross Elasticity of Demand

Responsiveness of demand to a change in the price of related goods.

Demand Forecasting

Predicting future product demand.