Econ chapter 4

ceteris paribus

a Latin phrase that means "all other things held constant"

inferior good

a good that consumers demand less of when their income increases

normal good

a good that consumers demand more of when their income increases

demand curve

a graphic representation of a demand schedule

elasticity of demand

a measure of how consumers react to a change in price

demand schedule

a table that lists the quantity of a good a person will buy at each different price

market demand schedule

a table that lists the quantity of a good all consumers in a market will buy at each different price

relationship between consumer tastes and advertising

advertising may be a factor in the change of consumer tastes and a shift in demand curves

how demand for a good affects demand for another good

an increase in demand for skis would cause an increase in demand for ski boots, since they are complements

for a demand curve to be accurate, we need ______

ceteries paribus - all other things held constant

law of demand

consumers buy more of a good when its price decreases and less when its price increases

changes over time effect on elasticity

demand is inelastic in the short term, but becomes more elastic over time due to substitutes

inelastic

describes demand that is not very sensitive to a change in price; milk is inelastic, since it is a necessity

elastic

describes demand that is very sensitive to a change in price; steak is elastic, since it is a luxury

unitary elastic

describes demand whose elasticity is exactly equal to 1

substitutes

goods used in place of one another; e.g. skis and snowboards

how does elasticity affect a company's pricing

if a firm knows there is elastic demand for a product, it knows price increase would reduce total revenues, and vice versa. inelastic demand + increase in price = increase in total revenue. elastic demand + decrease in price = increase in total revenue. inelastic demand + decrease in price = decrease in total revenue. elastic demand + increase in price = decrease in total revenue.

formula for unitary elastic demand

if elasticity is exactly equal to one

formula for elastic demand

if elasticity is greater than one

formula for inelastic demand

if elasticity is less than one

consumer expectation effect on demand for certain goods

if the price of a good is expected to increase, current demand increases and the person buys it sooner. if the price of a good is expected to decrease, current demand falls to zero and the person buys it when it is cheaper.

buying fewer slices of pizza when rising prices reduce real income

income effect

substitutes effect on elasticity

lack of substitutes makes demand inelastic, while a wide choice of substitutes makes demand elastic

the higher the price of pizza, the fewer slices people will buy

law of demand

necessities vs luxuries effect on elasticity

people always buy necessities like milk, so it is inelastic, but people don't always buy luxuries like steak, so it is elastic

formula for elasticity of demand

percentage change in quantity demanded divided by percentage change in price

example of a substitute good

snowboards instead of skis

eating salad or tacos instead of pizza when the price of pizza goes up

substitution effect

income effect

the change in consumption resulting from a change in real income

how does a change in factors that affect consumers' purchasing decisions affect the demand curve

the demand curve shifts, there is a change in demand

demand

the desire to own something and the ability to pay for it

consumer income effect on normal and inferior goods

the greater the income, the more demand for normal goods and less for inferior goods

total revenue

the total amount of money a firm receives by selling goods or services

effect of the baby boom generation on demand for certain goods

there was a higher demand for baby clothes, baby food, and books on baby care

complements

two goods that are bought together and used together; e.g. skis and ski boots

substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods