Chapter 2 - Demand (Econ 101 Notes)

A vocabulary-style set of flashcards covering key concepts from the lecture notes on demand, including individual and market demand, marginal analysis, and demand shifters.

Individual Demand Curve

A graph plotting the quantity of an item an individual plans to purchase at each price.

Ceteris Paribus

Holding other things constant.

Law of Demand

The tendency for the quantity demanded to be higher when the price is lower (holding everything else constant).

Marginal Principle

Break down the question of how many litres of gas to buy into a series of smaller marginal choices.

Cost-Benefit Principle

For each marginal choice, buy the additional litre of gas if the benefits exceed the costs.

Rational Rule for Buyers

Buy more of an item if the marginal benefit of one more is greater than (or equal to) the price; keep buying until Price = Marginal Benefit.

Marginal Benefit

The extra benefit from consuming one more unit; equal to the willingness to pay.

Marginal Benefit = Willingness to Pay

Your demand curve is also your marginal benefit curve; the price you’re willing to pay for each unit equals the marginal benefit of that unit.

Diminishing Marginal Benefit

Each additional unit yields a smaller marginal benefit than the previous one.

Market Demand Curve

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

Four-Step Process to Estimate Market Demand

1) Survey quantities at each price; 2) add up total quantity demanded by all customers; 3) scale up to represent the whole market; 4) plot the total quantity demanded at each price.

Market Demand Is Downward-Sloping

The law of demand at the market level: total quantity demanded is higher when price is lower.

Movement Along the Demand Curve

A change in quantity demanded caused by a change in price, moving along the demand curve.

Demand Shifters

Non-price factors that change consumers’ buying plans and shift the demand curve.

Income (Demand Shifter)

Demand for normal goods increases with income; demand for inferior goods decreases as income rises.

Normal Good

A good for which demand rises as income rises.

Inferior Good

A good for which demand falls as income rises.

Price of Related Goods

The prices of other goods can affect demand for a given good via substitutes and complements.

Substitutes

Two goods where a price increase in one raises demand for the other.

Complements

Two goods where a price increase in one reduces demand for the other.

Preferences (Demand Shifter)

Changes in tastes or preferences shift demand toward or away from a good.

Expectations (Demand Shifter)

If people expect higher incomes or prices in the future, it can affect current demand.

Congestion Effects

More users can reduce a good’s value and decrease demand.

Network Effects

A good becomes more valuable as more people use it, increasing demand.

Number of Buyers

A larger population or more buyers shifts market demand to the right.

Shifts vs Movements (Demand)

Shifts occur when non-price factors change demand; movements occur when price changes.

Market Demand vs Individual Demand

Market demand is the horizontal sum of all individual demand curves.