3.  branch of economics that examines individuals’ choices concerning 1 product/firm/industry

4.  quantities (Q) of a good that consumers are willing and able to purchase at various prices (P) during a given period of time

5.  table listing the quantities demanded (Q D ) at various prices (P)

6.  graph of the relationship b/t the price (P) of a good and the quantity demanded (Q D )  D = demand  neg. slope  P = prices  Y-axis  Q = quantities  X-axis

8.  the Q D of a good will be greater at lower P than will the Q D at higher P (ceteris paribus)  inverse relationship b/t P and Q

9. 1. diminishing marginal utility 2. income effect 3. substitution effect

11.  utility: amt. of satisfaction one receives from consuming a good  total utility (TU): total amt. of satisfaction from consuming an amt. of goods  marginal utility (MU): amt. of satisfaction from consuming 1 more unit of a good

12.  as additional units of a product are consumed, the additional satisfaction starts to 

13. Packets of crisps TU in utils 01234560123456 0 7 11 13 14 13 Utility (utils) Packets of crisps consumed (per day)

14. Packets of crisps TU in utils 01234560123456 0 7 11 13 14 13 Utility (utils) Packets of crisps consumed (per day) TU

15. Packets of crisps TU in utils 01234560123456 0 7 11 13 14 13 MU in utils - 7 4 2 1 0 Utility (utils) Packets of crisps consumed (per day) TU

16. Packets of crisps TU in utils 01234560123456 0 7 11 13 14 13 MU in utils - 7 4 2 1 0 Utility (utils) Packets of crisps consumed (per day) TU MU MU = ΔTU/ ΔQ

17.  the less of something you have, the more satisfaction you gain from each additional unit  MU you gain from that product is higher  you have  willingness to pay more for it  P are lower at higher Q D because your additional satisfaction diminishes as you demand more

19.  effect that  or  P has on buying power of income  P  = buying power  (income seems  )  P  = buying power  (income seems  )

21.  the change in the mix of goods purchased as a result of  or  relative prices  substitute: good that can be substituted for another  butter vs. margarine  coffee vs. tea  perfect substitute: red pencil vs. yellow pencil

22.  Example: If P of butter , you will buy margarine instead. Q D of butter .

23.  market demand schedule/curve: P and Q D for all consumers of a good combined (the market)  same principles apply to market as individuals

24. Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 Market demand (tonnes 000s) 700 A Point A Demand

25. Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 Market demand (tonnes 000s) 700 500 ABAB Point A B Demand

26. Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 Market demand (tonnes 000s) 700 500 350 ABCABC Point A B C Demand

27. Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 80 Market demand (tonnes 000s) 700 500 350 200 ABCDABCD Point A B C D Demand

28. Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 40 60 80 100 Market demand (tonnes 000s) 700 500 350 200 100 ABCDEABCDE Point A B C D E Demand

30.  change in quantity demanded (ΔQ D )  due to changes in:  price  results in:  movement along the demand curve  change in demand  due to changes in:  nonprice determinants  results in:  demand curve shift

33. INCREASE = shift to RIGHTDECREASE = shift to LEFT

34. 1. Income 2. Tastes & preferences 3. Prices of related goods 4. Expectations of future prices 5. Population size

35.  inferior goods: demand  as personal income  (“Spam effect”)  normal goods: demand  as personal income 

36. …what happens to your demand for filet mignon?

37. … what happens to their demand for filet mignon? … for Spam?

38. The “Friends” Haircut Hybrids, especially the Toyota Prius

40.  substitutes  goods that can replace one another  butter vs. margarine  price change for one leads to a shift in the same direction in the demand for the other  perfect substitutes: red pencils vs. yellow pencils  complements  goods that are used together  peanut butter & jelly  price change for one leads to a shift in the opposite direction in the demand for the other  perfect complements: right shoes and left shoes

41. … what happens to demand for margarine?

42. … what happens to demand for jelly?

43.  future ΔP and current ΔD move in the same direction  Ex. speculative buying. Google stock?  H 2 0 before a hurricane

45.  pop.   D   pop.   D  Ex. baby boomers hit retirement   demand for health care services

47.  responsive of consumers’ Q D to price changes  price elasticity of demand = %ΔQ D / %ΔP  %ΔQ D = |Q 2 – Q 1 | / Q 1  %ΔP = |P 2 – P 1 | / P 1

48. > 1price elastic (responsive) < 1price inelastic (not very responsive) = 1unitary elastic

49.  Let’s say that flat screen TVs normally cost $300, and demand is 2,000 per month.  Manufacturers reduce prices to $250. Consumption increases to 2,500 per month.  price elasticity = |2,500 – 2,000| / 2,000 |250 – 300| / 300 = 25% / 16.7% = 1.50 (price elastic)

50.  In April, gas cost $3 per gallon, and demand was 10,000 gallons per day.  In May, gas rose to $3.50 per gallon, and demand slipped to 9,750 gallons per day.  price elasticity = |9,750 – 10,000| / 10,000 |3.50 – 3| / 3 = 2.5% / 16.7% = 0.15 (price inelastic)

51. 1. ability to substitute  more substitutes = more elastic 2. proportion of budget spent on good  more expensive item = more elastic 3. length of time to permit changes  more time = more elastic

52. Gasoline is inelasticRestaurant meals are elastic

53. InelasticEstimated Elasticity of Demand Salt; matches; airline travel, short-run0.1 Gasoline0.2 (short-run), 0.7 (long-run) Physician services0.6 Approximately Unitary Elasticity Movies0.9 Private education1.1 Tires, long-run1.2 Elastic Restaurant meals2.3 Airline travel, long-run2.4 Fresh tomatoes4.6 Source: http://www.mackinac.org/article.aspx?ID=1247http://www.mackinac.org/article.aspx?ID=1247

55.  total amount of money a company receives from sales of a product  TR = P x Q

56.  Edie’s Little Bakeshop sells scones for $1.50 each and sells 600 per month. What is her total revenue?  TR = P x Q = ($1.50)(600) = $900

57.  price change has effect on total revenue  typical goal: price change should not decrease total revenue Elastic DemandInelastic Demand  P   TR  P   TR  P   TR  P   TR

58. Should manufacturers reduce the price to $250?  TR 1 = ($300)(2,000) = $600,000  TR 2 = ($250)(2,500) = $625,000 YES, because total revenue increases.