Micro Chapter 2: Demand: Thinking Like a Buyer

Rational Rule for Buyers

buy more of an item if its marginal benefit is greater than (or equal to) the price

complementary goods

goods that go together. Your demand for a good will decrease if the price of a complimentary good rises (hot dogs & hot dog buns)

substitute goods

goods that replace each other. Your demand for a good will increase if the price of a substitute good rises (you'll buy chicken instead if the beef went up $3)

Individual Demand Curve

A graph, plotting the quantity of an item that someone plans to buy, at each price.

demand curve shifts entirely when..

things other than price change

network effect

when a product or service becomes more useful to you as more people use it. If a product is more useful = yields greater marginal benefits = increasing your demand

Market Demand Curve

A graph plotting the total quantity of an item demanded by the entire market, at each price.

six factors that shift the market demand curve

1. income 2. preferences 3. prices of related goods 4. expectations 5. congestion and network effects 6. the type and number of buyers (only shifts market demand) (1-5 shifts individual demand and hence market demand)

Holding Other Things Constant (Ceteris Paribus)

A commonly used qualifier noting your conclusions may change if some factor that you haven't analyzed changes. Ceteris Paribus.. Assuming nothing else has changed..

Movement along the demand curve

A price change causes movement from one point on a fixed demand curve to another point on the same curve.

"P's Before Q's"

Price goes on the vertical axis, Quantity goes on the horizontal axis.

Law of Demand

The tendency for quantity demanded to be higher when the price is lower, and for demand to be lower when the price is higher.

PEPTIC

Things that shift the demand curve = Preferences Expectations Price of related goods Type and number of buyers Income Congestion and network effects

congestion effect

When a good becomes less valuable because other people use it. If more people buy such a product, your demand for it will decrease. (may not buy a dress if you see someone else already wearing it' avoiding a road that is already packed with cars so value decreases and you find an alternate route)

inferior good

a good for which higher income causes a decrease in demand (buying a car, bus rides become the inferior good). inferior goods = those where you're "making do" until your income rises and then you'll switch to a higher quality more expensive alternative

normal good

a good for which higher income causes an increase in demand

shift in the demand curve

a movement of the demand curve itself

decrease in demand

a shift of the demand curve to the left

increase in demand

a shift of the demand curve to the right

change in the quantity demanded

the change in quantity associated with movement along a fixed demand curve

Diminishing Marginal Benefit

the marginal benefit of each additional item is smaller than the marginal benefit of the previous item

Market Demand

the purchasing decisions of all buyers taken as a whole.