EVWL - Thinking Like a Buyer

13 flashcards · Economics · by ehartl

1. Describe the Individual Demand Curve

   Plots the quantity someone plans to buy at each price Price is Y-Axis, Quantity is X-Axis (P before Q) is always downward sloping holds other things constant (a change in other factors - i.e. quality, circumstances - would result in another individual demand curve, thus a IDC always looks only at price and quantity, while other things are considered as constant)

2. What is the Law of Demand?

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

3. How to choose the Best Quantity to Buy?

   Apply the core principles: Marginal principle: Break down "How many" questions into a series of smaller marginal choices. (What if I buy 1 gallon of gas? What if 2?... --> what are the benefits?) Cost-Benefit principle: buy as long as the benefits are greater (or at least equal) than the costs Opportunity Cost principle: Always ask "or what?" to compare your benefits to the next best alternative. (e.g. With one gallon of gas I can buy at Walmart in the next city. Or I could buy in the small sto…

4. What is the Rational Rule for Buyers?

   Buy one more if Marginal Benefit >= Price That means that the Price equals the Marginal Benefit, thus the Individual Demand Curve is also the Marginal Benefit Curve! (e.g. if you buy 2 gallons of gas at 4$, it's because your marginal benefit of the 2nd gallon is 4$)

5. How can the downward-sloping of the Individual Demand Curve can be explained with the Marginal Benefit?

   Each additional item yields a smaller marginal benefit than the previous item. "Diminishing Marginal Benefit" first gallon of gas: used for highest marginal benefit activity second gallon: used for an activity with a lower marginal benefit ...

6. What is the Market Demand Curve?

   A graph plotting the total quantity of an item demanded by the entire market, at each price. Market demand is the sum of the quantity demanded by each person.

7. Describe the 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. (other things are kept constant)

8. What is the Change in the Quantity Demanded?

   The change in quantity associated with movement along a fixed demand curve.

9. What is a Shift in the Demand Curve?

   A movement of the demand curve itself - because any of the other factors (other than the price) change. Increase in demand --> shift to the right Decrease in demand --> shift to the left

10. Which factors cause a Shift in the Demand Curve?

    Shift individual and hence market demand: Income Preference Price of related goods Expectations Congestion and network effects Shifts only market demand: Type and number of buyers Price change does not shift the demand curve!

11. Income: what are "Normal Goods" and "Inferior Goods"?

    normal good: a good for which higher income causes an increase in demand (e.g. restaurant meals) inferior good: a good for which higher income causes a decrease in demand (e.g. bus rides)

12. Related Goods: what are "complementary goods" and "substitute goods"

    complementary goods: goods that go together. Demand for a good will decrease if the price for a complementary good rises substitute goods: goods that replace each other. Demand for a good will increase if the price for a substitute good rises

13. Congestion and Network effects: What are "congestion effects" and "network effects"?

    Congestion effect: When a good becomes less valuable because other people use it. If more people by such a product, your demand for it will decrease. Network effect: When a good becomes more useful because other people use it. If more people buy such a good, your demand for it will also increase.