Microeconomics Chapter 2: Demand and Consumer Choice

Individual Demand Curve

A graph that plots the quantity of an item that an individuals plans to purchase at each price.

Individual

One Person

Demand

Examining buying decisions.

Curve

Graphing (sometimes these curves are straight lines)

Ceteris Paribus

Holding other things constant.

Law of Demand

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

How does the demand curve slope?

Down (“demand, down to the ground”)

Marginal Principle

Break down the question of “how many” into a series of smaller marginal choices

Cost-Benefit Principle

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

Opportunity Cost Principle

“Or what?” Make a comparison to the next best alternative.

The 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

Diminishing Marginal Benefit

Each additional item yields a smaller marginal benefit than the previous item.

Market Demand Curve

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

The Four-Step Process to Estimate Market Demand

1. Survey - ask each person the quantity they will buy at each price.

2. For each price, add up total quantity demanded by all customers.

3. Scale up the quantities to represent the whole market.

4. Plot the total quantity demanded at each price.

Movement Along The Demand Curve

A price change causes a movement from one point on a fixed demand curve to another point on the same demand curve.

Change In The Quantity Demanded

The change in the quantity associated with movement along a fixed demand curve.

Increase In Demand

A shift of the demand curve to the right.

Decrease In Demand

A shift of the demand curve to the left.

The Interdependence Principle

Everything is connected.

What are the 6 factors that shift the market demand curve?

1. income

2. preferences

3. prices of related goods

4. expectations

5. congestion and network effects

6. the type and number of buyers

… but not a change in price

Income

All your choices are interdependent because your have a limited amount of income to spend.

Normal Good

A good for which higher income causes an increase in demand.

• smartphone

• going out to eat

• organic fruits/veggies

Inferior Good

A good for which higher income causes a decrease in demand.

• fast-food meals

• nonorganic fruits and veggies

Preferences

preferences can change for any number of reasons:

• Life-altering event

• Marketing, influencers, and fashion cycles

• social pressure

• season/weather

Complementary Goods

Goods go well together. Your demand for a good will decrease if the price of a complementary good rises.

Substitute Goods

Goods that replace each other. Your demand for a good will increase if the price of a substitute good rises, and it will fall if the price of a substitute good falls.

Expectations

Future prices or future availability can influence your current demand - choices are linked through time.

Network Effects

When a good becomes more useful because other people use it.

Congestion Effect

When a good becomes less valuable because other people use it.

Type and Number of Buyers

If the composition of the market changes because of a change in demographic composition, then the market demand will also change.

Types of Buyers

As baby boomers continue to age, this will cause the demand for health care services to increase.

Number of Buyers

An increase in the population over time can increase the demand for goods and services, shifting the demand curve to the right.

Internal Trade

Can also increase the number of buyers.

Movement Along Demand Curve

If the only thing changing is the price of the good itself, then you are thinking about a movement along the demand curve. This is a change in the quantity demanded.

Shift Along Demand Curve

When other factors change, you need to think about a shift in the demand curve (recall the 6 factors). This is a change in demand itself.