Economics Week 2 Lectures 3 & 4

Complementary goods

Goods that are commonly used with other goods (iphones & airpods) Demand decreases when the price of complementary goods rises

What happens to the demand when price of complement goods rise/is high?

demand decreases/shifts to the left (ex: as the price of milk increases, I eat less cereal)

individual demand curve

set of plans holding other things constant. The quantity you plan to buy depending on the price

marginal benefit

the additional benefit to a consumer from consuming one more unit of a good or service

Extensive Margin

the cheaper something is, the more customers you get (individual demand)

Intensive Margin

the cheaper something is, the more each customer buys

Market Demand

the total quantity demanded by the market, at each price

How does change in tastes shift demand?

ex: change in fashion can increase or decrease demand causing a shift in demand.

How does income shift demand for normal good

increase in income causes an increase in demand for normal goods and shifts demand curve to the right

How do expectations shift demand curve?

Interdependence principle: choices are linked through time Buying tomorrow is a substitute for buying today

4 steps to estimate market demand

1. Survey customers (ask them about quantity demanded at each price) 2. add up total quantity demanded 3. Scale quantities demanded by the survey respondents (survey demand* (size of market/ size of survey)) 4. Plot the market demand curve

6 factors that shift market demand curve

1. income 2. tastes 3. prices of other goods 4. expectations 5. Network and congestion effects 6. The number and type of buyers (changes the scaling facto in moving from individual to market demand)

What happens to demand when few people use network goods?

Demand decreases/shifts to the left

What happens to demand when many people use congestion goods?

Demand decreases/shifts to the left (ex: when more people drive on the main road, I'm less likely to use it.)

What happens to demand when many people use network goods?

Demand increase/shifts to the right

What happens to the demand curve if prices are expected to fall?

Demand shifts to the left/demand decrease

What happens to demand curve if prices are expected to rise?

Demand shifts to the right/demand increases

Why do demand curves slope downward?

Diminishing marginal benefit (each additional item yields a smaller marginal benefit than the previous item)

How does higher income affect demand for inferior goods

Higher income causes a decrease in demand for inferior goods and shifts demand curve for inferior goods to the left

Substitute goods

Replace each other (ex: iphones & android phones) demand increases when the price of substitute goods rises

What happens to the demand curve when price of substitute goods rise?

Shifts to the right/demand increases (ex: if the price of soda increases, I drink more water)

Scaling Factor

Size of the market/size of the survey

What does your individual demand curve graph?

The quantity you plan to buy at a given price holding other things constant

What is the theory of demand?

The theory of marginal benefits

Congestion effects

When increasing numbers of users lower the value of a product or service. (ex: increased use by others will decrease demans- roads/ski resorts)

Network effects

When the value of a product or service increases as its number of users expands (ex: instagram )

What is a market demand curve

a graph showing how much of a product a market is willing and able to buy

How does price of other goods effect the demand curve?

demand increases when price of substitute goods rises and decreases when the price of complemntary goods rises

What happens to the demand when price of complement goods fall/is low?

demand increases/ shifts to the right (ex: when the price of taxis fall, I go out more)

What happens to demand when few people use congestion goods

demand increases/shifts to the right (ex: when fewer people are out skiing, I'm more likely to ski)

Inferior goods

goods that you make do with because of constrained income. goods that consumers demand less of when their incomes rise

Normal good examples

normal goods include food, clothing, and household appliances

What happens to the demand curve when price of substitute goods fall?

shifts to the left/demand decreases (ex: when price of taxis fall i take the bus less)

Law of demand

the quantity demanded is higher when prices are lower