Economics Chapter 7

ceteris paribus

"other things held constant" or "all else unchanged"

determinants of price elasticity

1. availability of substitutes yes - elastic no - inelastic 2. % of income spent a lot - elastic a little - inelastic 3. Length of Time to Respond to Price Change Short Time: more inelastic Longer Time: more elastic 4. Need vs. Luxury Need: inelastic Luxury: elastic [can delay purchase if necessary]

I can explain the difference between a CHANGE IN QUANTITY DEMANDED and a CHANGE IN DEMAND

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.

elasticity of demand

A measure of how sensitive or responsive consumers are to a change in price Not if they respond to a price change, but how much they respond price increase = increase tr[total revenue] price decrease = decrease TR

I can differentiate between elastic and inelastic demand

A product with an elasticity greater than one is defined as elastic. A product with an elasticity less than one is defined as inelastic. Generally, most necessities will be considered inelastic. Gasoline, for example, is inelastic because no matter the price, consumers will continue to buy gas in droves.

inelastic demand

Consumers are NOT very sensitive or responsive to a change in price

E

EXPECTATION OF FUTURE PRICE - if a future price of a good/service is expected to increase current demand will increase- customers will buy now - if the future price of a good service is expected to decrease, current demand will decrease customers will buy when the price is lower

I can explain the LAW of DEMAND to another student using a PERSONAL example from my own life.

I go on the kylie jenner website to buy her lipsticks and the original price is $25, in the first 30 minutes they all sell out, later after that they are selling for 60 dollars similarly i go to sephora to buy shampoo endorsed by selena gomez and its 10 dollars, but a few months later I see the same bottle for 4 dollars

I

INCOME - normal goods, goods for which demand increases when income increases - inferior goods, goods for which demand decreases when income increases

Determinants of demand

M E R I T

I can RECALL the FIVE determinants of demand that cause the ENTIRE demand curve to shift right[increase in demand] or to the left [decrease in demand]

M = More or Less Buyers in a Market E = Expectations [EX: Future Price of a Good] R = the price of a Related good changes; Complement or Substitute I = Income [Normal vs. Inferior Good] T = Tastes and Preferences [Trends/Fads] that affect consumers

M

MORE OR LESS BUYERS IN A MARKET more buyers in a market for a good/service will increase demand[curve shift left] will decrease demand[curve shift left]

T

TASTES AND PREFERENCES - consumers interests change and as a result demand changes - as something becomes trendy demand tends to increase, when something goes out of style, demand decreases -furthermore when popular, well-liked celebrities or athletes advertise a good/service demand tends to increase

R

THE PRICE OF A RELATED GOOD CHANGES; COMPLEMENT OR SUBSTITUTE - if price of complement were to increase demand for good would decrease - if price of complement were to decrease demand for good would increase - if the price of substitute were to increase demand for good would increase -if price of substitute were to decrease, demand for good would decrease

market demand

a place where buyers[demand] interact with sellers[supply] because both expect to benefit

I can create and interpret a DEMAND SCHEDULE and use it to create and interpret DEMAND CURVE

[look it notebook boo]

elastic demand

a consumer is very sensitive or responsive to a change in price

demand curve

a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time

complementary goods

a product often used with another product

demand schedule

a table of prices and quantity demanded

I can explain how demand changes for NORMAL or INFERIOR goods/services based on a person's income changes [income INCREASES, demand for NORMAL goods INCREASE, but demand for INFERIOR goods decrease]

an inferior good is a good whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases), unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers' demand increases when their income increases.

real income effect

economic rule stating that individuals cannot keep buying the same quantity of a product if its price rises while their income stays the same

I can identify FACTORS, or DETERMINANTS that affect Elasticity of Demand and use them to help explain why some goods have elastic demand and others have inelastic

ex; insulin is inelastic demand because it is neccessity with no close substitutes

substitution effect

if two items satisfy the same need and the price of one rises, people will buy more of the other

I can explain the difference between MOVEMENT ALONG A DEMAND CURVE [ caused by a change in price - all else held constant] and shift of the curve caused by a determinant other than current price]

movement in the demand curve occurs when the price of a product changes shifting in the demand curve occurs when there are decreases in demand. Conversely, demand can decrease and cause a shift to the left of the demand curve for a number of reasons, including a fall in income, assuming a good is a normal good, a fall in the price of a substitute and a rise in the price of a complement.

Law of demand

price goes down, quantity demanded goes up, price goes up, quantity demanded goes down

Law of diminishing marginal utility

the additional satisfaction a consumer gets from purchasing one more unit of a product will lessen with each additional unit purchased

demand

the amount of a good or service that consumers are able and willing to buy at various possible prices during a specified time period

utility/marginal utility

the power that a good or service has to satisfy a want, additional satisfaction

I can explain how the SUBSTITUTION EFFECT, INCOME EFFECT, and DIMINISHING MARGINAL UTILITY help explain the law of demand.

the substitution effect says that the price of one good is relative to the prices of other goods, the real income effect states that - assuming income is fixed consumers will buy more if the price drops and less if the price rises, marginal utility states that your additional satisfaction will lessen with each additional product bought. this helps explain the law of demand because these are the important factors that explain the slope of the demand curve and advocates that the law of demand is valid.