ECON 2301-01 Ch. 7

Inferior Good

Goods that have a negative income elasticity, so that as consumer income rises, the demand for goods falls.

Normal Good

Goods that have a positive income elasticity, so that as consumer income rises, so does the demand for goods

Important Point 15: Income elasticity estimations

Goods that people regarded as "necessities" will have low income elasticities (between 0 & 1), while goods that people regarded Goods that people regarded as "luxuries" will have a high (more than 1) income elasticity. As income expands, the demand for inferior goods will decline, but this also works in the opposite direction.

Important Point 4: Price results

At any given price, consumers will bought all units of a good for which their maximum willingness to pay (Marginal Benefit) is more then the price.

Important Point 3: Marginal Benefit

Because consumers are willing to pay for a unit of good is directly related to the utility derived from consuming said unit, The Law of Diminishing Marginal Utility implies that the consumer's Marginal Benefit, and thus the demand curve's height, falls as the quantity consumed rises.

Important Point 16: Price elasticity of supply

Because this measures the responsiveness of sellers to price changes, it's analogous to the Price elasticity of demand. But, the Price elasticity of supply will be positive because the quantity producers are willing to supply is directly related to price, & time plays a role for this as well.

Important Point 10: Product's Share of the Consumer's Total Budget

If the expenditures on a product are quite small relative to the consumer's budget, the income effect will be small even if there's a substantial increase in the product's price; making demand less elastic

Important Point 8: Straight-line demand curves

Since elasticity is a relative concept, the elasticity of a straight-line demand curve will differ at each point along the demand curve.

Substitution Effect

That part of an increase/decrease in amount consumed that's the result of goods being less/more expensive in relation to other goods due to an increased/decreased price.

Income Effect

That part of an increase/decrease in amount consumed that's the result of the consumers real income being expanded/contracted by a decrease/increase in a good's price.

Important Point 5: Demand schedule

The Demand curve/schedule shows the amount of a product that consumers are willing to buy at alternate prices during certain time periods. The Law of demand states that the amount of the purchased product is inversely related to its price

Important Point 1: Fundamentals of Consumer Choice

The Key factors that influence consumer behavior are: 1. Limited Income necessitates choices 2. Consumers make decisions purposefully 3. 1 good can be substituted for another 4. Consumers must make choices without perfect info, but past experiences and knowledge will help. 5. The Law of Diminishing Marginal Utility applies: As the rate of consumption increases, the Marginal Utility gained from consuming the good's extra units will decline

Important Point 2: The Law of Diminishing Marginal Utility

The Law of Diminishing Marginal Utility explains why, even if you really like a certain product, you won't spend your whole budget on it. As you raise your consumption of and good, the utility you derive from each additional unit will get more smaller unit it eventually becomes less than the price. At that point, you won't want to buy any more units of the good

Important Point 7: Market demand reflection

The Market Demand Schedule is the relationship between the good's market price and the amount demanded by all people in the market area. Since individual consumers buy less at high prices, the amount demanded in a market area as a total is also inversely related to its price. The Demand curve is also just the horizontal sum of the individual demand curves of consumers.

Marginal Utility

The additional utility, or satisfaction, derived from consuming a goods extra unit

The Law of Diminishing Marginal Utility

The basic economic principle that as the product's consumption increases, the marginal utility derived from consuming more of it (per unit of time) will eventually declined

Marginal Benefit

The max price a consumer will be willing to pay for a product's extra unit. it's the dollar value of the consumer's marginal utility from the extra unit, & therefore it falls as consumption rises

Important Point 9: Substitute availability

The most determinant of the price elasticity of demand is the availability of substitutes. When good substitutes for products are available, a price increase induce many consumers to switch to other products. Demand is elastic

Income Elasticity

The percentage change in a product's quantity demanded divided by The percentage change in consumer income that caused the change in quantity demanded. It measures the responsiveness of the good's demand to the consumer's income changes.

Price elasticity of supply

The percentage change in quantity supplied, divided by the percentage change in the price that causes the change in quantity supplied

Price elasticity of demand

The percentage change in the product's quantity demanded divided by the percentage change in the price that caused the quantity changes. This term indicates how responsive consumers are to a product's price changes.

Important Point 14: Unitary demand elasticity

When demand elasticity is Unitary, the change in quantity demanded will be equal in magnitude to the price changes. With regard to their impact on Total Expenditures, these 2 effects will exactly offset each other. Thus, when price elasticity of demand is equal to 1, Total Expenditures will remain unchanged as price changes.

Important Point 13: Total Expenditures and Quantity

When demand is elastic, the quantity change will be greater then the price change. Thus, the impact of the quantity change will dominate, and therefore the price and total expenditure will move in opposite directions.

Important Point 12: Total Expenditures and price

When demand is inelastic, the price elasticity coefficient is less than 1; making the percentage change in price more that the percentage change in quantity. Therefore, when demand is inelastic, the price changes will dominate &, as a result, the price and total expenditure will change in the same direction.

Important Point 11: Time and Demand Elasticity

When the product's price rises, consumers will reduce their consumption by a bigger amount in the long run than the short run. Thus, the demand for most products will be more elastic than the short run. This relationship between elasticity and adjustment time lengths is sometimes referred to as the 2nd law of demand.

Important Point 6: Time is Money

You may have heard the phrase, "Time is Money". It's certainly true that time has value, which can sometimes be measured in US dollars. As we have learned, the good's monetary price isn't always a complete measurement of its cost to the consumer. Consuming most goods requires both time and money, which both of them are scarce to consumers. So a lower time cost, like a lower money price, will make a product more attractive.