Chapter 5 - Demand

• Law of demand: people do less of what they want to do as the cost of doing it rises.

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Translating wants into demand

• Marginal utility: additional utility gained from consuming an additional unit of a good.

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• Law of diminishing marginal utility: tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point.

  

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Rational spending rule

• Rational spending rule: spending should be allocated across goods so that the marginal utility per dollar is the same for each good.

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→ The rule highlights the fact that real, as opposed to nominal, prices and income are what matter. The demand for a good falls when the real price of a substitute falls or the real price of a complement rises.

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Individual and market demand curves

• Horizontal addition: process of adding individual demand curves to get the market demand curve.

  

  

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Demand and consumer surplus

• Consumer surplus: difference between a buyer’s reservation price for a product and the price actually paid.

  

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