Econ Chapter 4
law of diminishing marginal utility
As consumption increase, the marginal utility from that additional consumption decrease
If the product is not good then demand will not rise.
How do consumer expectations affect demand?
total revenue test
Measures the change in total revenue that occurs from a change in the price per unit. The degree of price elasticity changes over the range of the demand curve
Total revenue test
What are two methods for calculating elasticity of demand?
It means that when the price increases the quantity demanded decreases, and when the price decreases the quantity demanded increases.
What does it mean when quantity demanded and price have an inverse relationship?
A change in quantity demanded represents a movement along the current demand curve, while a change in demand represents a shift in the entire demand curve.
What is the difference between change in quantity demanded and change in demand?
For a consumer to have a demand they have to be willing and able.
What two things are necessary for a consumer to have demand for a good or service?
income effect
When price rise, consumer's real income falls because their purchasing power decrease. So consumer can demand less quantity. When price falls, consumer's real income rises because their purchasing power increased. So consumer can demand more quantity.
normal goods
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 a consumer reacts to a change in price
change in quantity demanded
a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price
demand schedule
a table that lists the quantity of a good a person will buy at various prices in the market
Law of Demand
an increase in prices causes a decrease in quantity demanded; a decrease in price causes an increase in quantity demanded
inferior goods
change in price causes a big change in quantity demanded
inelastic
demand that is not very sensitive to price changes; a small change in price causes a small change in quantity demanded
elastic
demand that is very sensitive to price changes; a small
unit elastic
demand whose elasticity is exactly equal to 1
substitutes
goods that are used in place of one another
substitution effect
if price of a product falls, this decreases its relative expensiveness, so consumers will substitute more of this good for the other. Also when price of product falls, the consumer will no longer be in equilibrium until more of the item is purchased and the marginal utility of the item declines to match the decline in price. If price of a product rise, Vice Versa then.
change in demand
something that causes the demand curve itself to shift.
Demand
the amount of goods and services people are willing and able to purchase at various prices during a specific time period
total revenue
the amount of money a company receives from selling goods or services; price x quantity
complements
two goods that are bought and used together
