Demand Chapter 2 Exam 1
Quantity demanded
- the amount of a product that a consumer would buy in a given period if it could buy all it wanted at the currency market price
Households
- the consuming units in an economy - consumer outputs and supply inputs
Market demand curve
- A graph plotting the total quantity of an item demanded by the entire market, at each price - a change in price causes a movement along the demand curve, creating a change in the quantity demanded - never add prices add total quantities
Your preferences
- Changes in your preferences can shift your demand curve - What if Darren had a baby? His entire consumption bundle might change as he considered his new needs. Would he want to drive to work more so that he could rush home if the baby got sick? Or would he take the bus more so that he could enjoy a few minutes of rest? - - Large numbers of marketers trying to figure out how to take advantage of the changes in people's demand due to life events like getting married or having a baby, or advertising and social pressures
Estimating market demand curve
- Survey your customers, asking each person the quantity they will buy at each price. - For each price, add up the total quantity demanded by your customers. - Scale up the quantities demanded by the survey respondents so that they represent the whole market. - Plot the total quantity demanded by the market at each price, yielding the market demand curve.
Economic surplus
- The difference between the marginal benefit and the marginal cost of taking that action
Mixed Economy
- US is a mixed economy including traditional, command, and market economy, all real systems are in some sense mixed : - Tradition includes thing like tipping in restaurants - Command includes welfare, roads, military - Market includes iPhone, twix bar
3 questions of market economics
- What gets produced? Determined by people "voting" with their dollars - How is it produced? Determined by the cost of production and the preferences of consumers - Who gets it? Those who pay for it
Inferior goods (income)
- a good for which higher income or wealth causes a decrease in demand - good that consumers demand less of when their incomes increase - if your demand for goods decreases when your income rises - for instance when you're in college and struggling with a limited income, you might take the bus a lot, but when you get your first full-time job, you might buy your own car - examples include ramen noodles, potatoes, used cars, generic anything, as income rises your demand curve shifts back because you don't have to buy as many cheap goods
Individual demand curve (marginal benefit curve)
- a graph, plotting the quantity of an item that someone plans to buy, at each price - price always goes on the vertical axis, and the quantity demanded goes on the horizontal axis - downward sloping which means that as the price gets lower, the quantity demanded gets larger
Free enterprise (market economy)
- an economy that allows business owners to compete in the market with little government interference - is the freedom of the individuals to start and operate private businesses
Normal goods (income)
- as income increases, demand increases - as income decreases, demand decreases - if your demand for a good increases when your income is higher, we call it a normal good examples include electronics, toys, movies, clothes
Income effect (demand)
- as the price of anything you buy goes up, you feel poorer so you buy less of everything including the good whose price rose
Substitution effect (demand)
- as the price of one good rises, people switch from buying that good to buying other goods
Diminishing marginal benefit
- as you consume more of one thing, holding all else constant, your additional marginal benefit will fall - the more we buy the less benefit we get from each unit - you eat one scoop of ice cream, and it gives you a great marginal benefit, if you keep eating additional scoops your marginal benefit will fall, implicitly willing to pay less and less for each unit - time affects how long it takes to diminish marginal utility
Income (interdependence)
- changes in income (per period) or wealth (money you have) can shift demand curves, sum of all households wages, salaries, profits, interest payments, rents, and other form of earnings in a given period of time, it is a flow measure - wealth is the total value of what a household owns minus what it owes - All of your individual choices are interdependent, since you only have a limited amount of income to spend - Money you spend on gas is money that you can't spend on clothes, but when your income is higher, you can afford to buy a larger quantity of both - At each and every price level, you can buy a larger quantity of gas causing your demand curve to shift to the right (increase in demand) - If your income were to fall, then you would probably choose to buy less gas at each and every price, shifting your demand curve to the left (decrease in demand) - Normal good: If your demand for a good increases when your income is higher, we call it a normal good - Inferior goods ("making do"): If your demand for goods decreases when your income rises, for instance when you're in college and struggling with a limited income, you might take the bus a lot, but when you get your first full-time job, you might buy your own car.
Complementary goods (price of related goods)
- goods that go together and compliment each other - your demand for a good will decrease if the price of the complementary good rises - when the higher price of one good decreases your demand for another good, when the lower price of one good increase your demand for another good - example includes hot dogs and hot dog buns
Type and number of buyers
- if the composition of the market changes through demographic composition or type of buyers in the market, then market demand will also change - For instance, the baby boom that followed World War II initially led to an increase in the demand for baby clothes, as this cohort progressed through their lives, there was an increase in the demand for school books, then for college education, and subsequently for houses, cars, and child care - if the number of potential buyers rises then there are more individual demand curves to add up when calculating market demand - an increase in the number of potential buyers shifts the market demand curve to the right.
Rule of thumb
- if the only thing that's changing is the price, then you're thinking about a movement along the demand curve - when other market conditions change, you need to think about shifts in the demand curve - a demand curve is a plan for how to respond to different prices, and if buyers' plans haven't shifted, then the market demand curve hasn't shifted - when other factors change the quantity that someone demands at a given price, they lead to a shift in demand curve - to figure out whether a change in market conditions will shift the demand curve, ask yourself: Has something changed that would cause you to give different answers to a survey about the quantity you'll demand at each price? If so, then this will shift your demand curve. - not every change in market conditions will cause the demand curve to shift
Command economy
- is an economy in which a central government either directly or indirectly sets output targets, incomes, and prices (centrally planned), those in charge answer all three questions - North Korea, Cuba in the 1980's and 1990's had a really good health industry because they decided to invest in it and the government had full control over it
Market economy (Laissez-faire: allow them to do)
- is an economy in which individual people and firms pursue their own self interests without any central direction or regulation, based on the concept of private ownership - ownership means that people should be able to do what they want with the things they buy - consumer sovereignty is the idea that consumers ultimately dictate what will be produced or not produced by choosing what to purchase and what not to purchase - free enterprise is the freedom of the individuals to start and operate private businesses - no pure market economies, but Hong Kong, Singapore, and New Zealand may be the closest and the United States is "mostly" a market economy
Traditional Economy
- is an economy in which tradition alone determines the nature of economic activity, tradition answers all three questions - Shell trading in the Trobriand islands where necklaces went clockwise and armbands went counterclockwise
Individual demand
- is what you want at each price, thinking about how buyers decide what and how much of something to buy
Law of demand
- price and quantity are inversely related, as the prices goes up, the quantity that people want to buy falls
Marginal benefit
- price equals marginal benefit, the maximum amount a consumer will pay for an additional good or service
Price Theory
- prices are the basic coordinating and signaling mechanism - the basic coordinating mechanism is price. The unfettered movement of price is what defines a "free" market.
Demand (output markets)
- relationship between the price of a good and the quantity of that good that the consumers are willing and able to buy per period, other things constant - a relationship between the price of a good and the quantity of that good consumers are willing and able to buy per period other things constant quantity = f (price)
Interdependence Principle
- reminds you that a buyer's best choice also depends on many other factors beyond price, and when these other factors change, so might their demand decisions - for instance, the quantity of gas you'll buy (at any given price) might change when you get a pay raise, the amount of traffic increases, or the price of alternatives such as catching the bus falls. When you're no longer holding these other things constant, the demand curve may shift
Substitute goods (price of related goods)
- replace each other - your demand for any good will increase if the price of its substitutes rises and your demand will decrease if the price of substitutes falls - coke and pepsi
Congestion effect (congestion and network effects)
- some products become less valuable when more people use them, yielding less marginal benefits decreasing demand
Economics
- study of how individuals and societies choose to use the scarce resources to satisfy unlimited wants
Expectations
- the anticipations of consumers, firms, and others about future economic conditions - as a consumer, you get to choose not only what to buy, but also when to buy it - your choices are linked through time, this simple insight can help you save money, and along the way, shift your demand curves.
Perfect competition
- the degree of competition in which there are many sellers in a market and none is large enough to dictate the price of a product
Firms
- the institutions that organize the production of goods and services - organizations that transform resources (inputs) into products (outputs), determine types and quantities of products supplied and the types of quantities of inputs demanded
Consumer sovereignty (market economy)
- the power of consumers to decide what gets produced - is the idea that consumers ultimately dictate what will be produced or not produced by choosing what to purchase and what not to purchase
Market demand
- the purchasing decisions of all buyers taken as a whole, sum of the quantity demanded by each person - add up individual demand to discover market demand
Law of demand
- the tendency for quantity demanded to be higher when the price is lower
Issues with market economy
- they do not always produce what people want at lowest cost there are inefficiencies - rewards like income may be unfairly distributed and some groups may be left out - periods of unemployment and inflation recur with some regularity - market failures may cause more inefficiency, because of these issues the government is often needed to fix what is wrong with the system
Congestion and network effects
- usefulness of some products or your demand for them is shaped by the choices that other people make - think about social-networking websites, many American college students use Facebook, Instagram, or Snapchat, but in China, WeChat is the most popular social media platform - this is an example of a network effect—where a product or service becomes more useful to you as more people use it - if a product is more useful, it yields greater marginal benefits, increasing your demand - Network effect: where a product or service becomes more useful to you as more people use it, yields greater marginal benefits increasing your demand - Congestion effect: some products become less valuable when more people use them, yielding less marginal benefits decreasing demand
Working market economy
- we need to have an established system of private property Three entitlement of Private property: - the right to consumer your property and use it as long as you don't harm others - the right to transfer or sell property to whomever you please, including your labor - the right to exclude anyone from using your property or interfering with it
3 questions of economics
- what to produce, how to produce it, for whom to produce it
Shift in demand curve
- when the demand curve itself moves - because your demand curve is also your marginal benefit curve, any factor that changes your marginal benefits will shift your demand curve. - a rightward shift is an increase in demand, because at each and every price, the quantity demanded is higher, - a leftward shift is a decrease in demand, because the quantity demanded is lower at each and every price.
Network effect (congestion and network effects)
- where a product or service becomes more useful to you as more people use it, yields greater marginal benefits increasing your demand - describes how products in a network increase in value to users as the number of users increases
Output Market
- where firms do the selling and households do the buying, goods and services are exchanged
Input Market
- where households do the selling and firms do the buying, resources used to produce products are exchanged - firms buy resources that they need in the production of goods and services.
Prices of related goods
- your choices are also interdependent across different goods - your demand for hot dogs is closely related to your demand for hot dog buns, if the price of hot dog buns rises, you'll buy fewer hot dog buns and fewer hot dogs - the higher cost of hot dog buns causes a decrease in your demand for hot dogs, shifting your demand curve for hot dogs to the left. - complementary goods: when the higher price of one good decreases your demand for another good, when the lower price of one good increase your demand for another good - substitute goods: replace each other, your demand for any good will increase if the price of its substitutes rises and your demand will decrease if the price of substitutes falls
Interdependence Principle factors (beyond price)
1. Income (shift individual and market demand) 2. Preferences (shift individual and market) 3. Prices of Related Goods (shift individual and market) 4. Expectations (shift individual and market) 5. Congestion/network effects (shift individual and market) 6. The type and number of buyers (only shifts market demand)
Rational rule for buyers
Darren Gas Example: - The marginal principle says that you should break "how many" questions into a series of smaller marginal choices. Darren's clearly thinking this way, considering each additional, or marginal, gallon of gas separately, and how he would use it. - For each of these marginal decisions, Darren's best choice depends on the cost-benefit principle, which says: Yes, he should buy that additional gallon of gas if its benefit exceeds the cost. - When Darren evaluates his marginal benefits, he applies the opportunity cost principle, asking: "Or what?" He doesn't just ask about the benefits of driving to Walmart; he compares it to the next best alternative, which is doing his shopping nearby. It's only by comparing driving to Walmart with the next best alternative that he figured out that the marginal benefit of the first gallon of gas is $5. - The rationale rule leads to the conclusion that Darren should keep buying additional gallons of gas as long as the marginal benefit is greater than (or equal to) the price. - The interdependence principle is in Darren's reasoning, his decisions depend on the availability of the bus, his desire to go to the gym, and even his love for his parents! For now, we're focusing only on the effects of different prices, holding these other things constant.
PEPTIC acronym
Preferences Expectations Price of related goods Type and number of buyers Income Congestion and network effects
