Ch 2 | Law of Demand

What is a smart choice?

A choice that considers whether a better alternative is available.

What are marginal choices?

Choices about whether to do a little more or a little less of an activity.

What is marginal benefit?

The additional benefit from one more unit of a good or activity.

How does marginal benefit usually change as quantity increases?

It decreases as quantity increases.

What is the water-diamond paradox?

Water has high total benefit but low marginal benefit, while diamonds have lower total benefit but higher marginal benefit.

Why does water have a low marginal benefit?

Because water is abundant, so an additional unit provides relatively little additional benefit.

Why do diamonds have a high marginal benefit?

Because diamonds are scarce, so an additional unit provides relatively high additional benefit.

What determines how much someone is willing to pay for a unit?

The marginal benefit of that unit.

What are preferences?

People's wants and the intensity of those wants.

What is demand?

The willingness and ability to pay for a good or service at different prices.

What is quantity demanded?

The amount of a good or service consumers are willing and able to buy at a particular price.

What is market demand?

The sum of the quantities demanded by all consumers in a market at each price.

What is the law of demand?

As the price of a good or service rises, its quantity demanded decreases, other things remaining constant.

What happens to quantity demanded when price decreases?

Quantity demanded increases, other things remaining constant.

What does a demand curve show?

The relationship between the price of a good and the quantity demanded, holding other factors constant.

Why does the demand curve slope downward?

A higher price leads to a lower quantity demanded, other things remaining constant.

How do you read a demand curve?

Start with the price on the vertical axis and move across to find the corresponding quantity demanded.

How do you read a marginal benefit curve?

For a given quantity, read up to the curve and then across to find the maximum willingness to pay for that unit.

What causes a change in quantity demanded?

A change in the good's own price.

What causes a change in demand?

A change in a factor other than the good's own price that affects willingness and ability to pay.

What is an increase in demand?

An increase in willingness and ability to pay, shown by a rightward shift of the demand curve.

What is a decrease in demand?

A decrease in willingness and ability to pay, shown by a leftward shift of the demand curve.

What is the key difference between demand and quantity demanded?

Quantity demanded changes because of price; demand changes because of non-price factors.

What happens when demand increases?

The demand curve shifts right.

What happens when demand decreases?

The demand curve shifts left.

What factors can change demand?

Preferences, prices of related goods, income, expected future prices, and the number of consumers.

How does an increase in preferences affect demand?

It increases willingness to pay at any given price, shifting demand right.

What is a substitute?

A good or service that can be used in place of another to satisfy a similar want.

What happens to demand for a good if the price of its substitute rises?

Demand for the good increases.

What is a complement?

A good or service that is used together with another good or service.

What happens to demand for a good if the price of its complement falls?

Demand for the good increases.

What is a normal good?

A good for which demand increases when income increases.

What happens to demand for a normal good when income increases?

Demand increases.

34. What is an inferior good?

A good for which demand decreases when income increases.

What happens to demand for an inferior good when income decreases?

Demand increases.

What happens to current demand when a future price increase is expected?

Current demand increases.

Why can an expected future price increase raise current demand?

Consumers may buy more now before the price is expected to rise.

What happens to market demand when the number of consumers increases?

Market demand increases.

When does the demand curve shift?

When a factor other than the good's own price changes demand.

What causes movement along the demand curve?

A change in the good's own price.

When does the demand curve shift?

When a non-price factor changes demand (a factor other than the good’s own price).

What causes movement along the demand curve?

A change in the good’s own price, which changes quantity demanded.

What two forces does the demand curve combine?

Switching to substitutes and willingness and ability to pay.

What does the demand curve also represent?

A marginal benefit curve.

How can marginal benefit change?

Marginal benefit changes with circumstances.

What determines willingness to pay for a unit?

Its marginal benefit, not its total benefit.

How is the demand curve read as a demand curve?

Read over from price to the curve, then down to quantity demanded.

How is the demand curve read as a marginal benefit curve?

Read up from quantity to the curve, then over to willingness to pay.

What is the relationship between quantity demanded and price?

When price changes, quantity demanded changes, causing movement along the demand curve.

What is the relationship between demand and non-price factors?

A change in a non-price factor shifts the entire demand curve.