Chapter 3: Nature of Demand

total revenue

(total receipts) the total income that a business receives from selling its products

demand curve

a way to show the relationship between the price of a product and the quantity demanded

quantity demanded

amount of a good or service that a consumer is willing and able to buy at each particular price during a given time period

demand

amount of a good or service that a consumer is willing and able to buy at various possible prices during a given time period

income effect

any increase or decrease in consumers' purchasing power caused by a change in price

diminishing marginal utility

as more units of a product are consumed, the satisfaction received from consuming each additional unit declines

demand schedule

schedule that lists the quantity of goods that consumers are willing and able to buy at a series of possible prices

the passage of time allows factors other than price to

shift the entire demand curve

purchasing power

the amount of money or income that people have available to spend

elasticity of demand

the degree to which changes in a good's price affect the quantity demanded by consumers

substitution effect

the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive

elastic demand

when a small change in a good's price causes a major, opposite change in the quantity demanded

if a firm lowers the prices of a good with elastic demand there will be a

Large increase in the quantity supplied

perfectly inelastic supply

Producers cannot increase supply regardless of price

inelastic demand

change in price has little change or impact on the quantity supplied

3 major determinants of demand

consumer tastes and preferences, market size, consumer expectations

market size

decisions by private companies, governments, technology, income, prices of related goods

determinants of demand

factors that shift the entire demand curve of a product to the right or to the left instead of simply causing movement along the old demand curve

complementary goods

goods that are commonly used with other goods (ex. paintbrushes and paint)

substitute goods

goods that can be used to replace the purchase of similar goods when prices rise

law of demand

inverse relationship between price and quantity demanded

consumer expectations

make purchase with expectation of future pay

nonprice determinants of demand

market size, income, and prices of related goods

generic products

nonbrand-name products

three factors that affect market size

private business decisions, government policy, and new technology

change in any of the determinants of demand can

produce an entirely new demand curve for a market