Class1:WTP & Consumer Surplus / Diminishing Marginal Utility / Demand Curve Moves / Price Elasticity Flashcards
(22 cards)
How is “Consumer Surplus” calculated?
Willingness to Pay - Price of good sold
What is another way to think about WTP. from the customer perspective?
The utility they get from the service or product
What is the term for when a person values something less (or enjoys it less) as they get more of it?
“Diminishing Marginal Utility”
Why are companies willing to seel you more stuff after initial purchase, for less money?
Due to diminishing marginal utility. You value those less, ,TV’s “extra premium channels at a discounted price”
What are the 6 variables of a market demand curve (Q)? and how is each correlated to the Demand?
3P.I.N.U 1. Price (-) 2. P.Substitute (+) 3. P.Complement (-) 4. Income(+) 5. Total Buyers [N] (+) 6.Utility (tastes) (+/-)
What does the “Law of Demand” say?
There is an inverse (negative) relationship between price and quantity demanded
Of the 6 varibles in market-demand function, which shift the curve rather than just a move along the curve?
All shift the curve except a change in price alone
What happens to the curve when: - Substitute price goes up?
shiftt out
What happens to the curve when: - Complement price goes up?
shifts in
What happens to the curve when: - income goes up?
shifts out
What happens to the curve when: - Numbers goes up?
shifts out
What happens to the curve when: - utility goes up?
shifts out
How to construt the demand curve from info by each individual?
Simply add willingness of tatall q purchase for each price point.
Contrast the Demand Curve with the Inverse demand curve.
Demand Curve = Read horizontally, to be able to add the Qs of individuals and have the market demand, see pic. The formula is Q as a function of P (Q=12-2*P)
Inverse Demand Curve = Read vertically, for Q then P. The formula is P as a function of Q (P=6.5-0.5*Q)
Whats is the equation of linear demand? and it’s inverse?
What is the aggregate consumer surplus in market?
It is the sum of all the consumer surplus of all the buyers in the market. Measured by the area below the demand (max WTP) and above the price line.
Remember that consumer surplus is WTP - The paid amount
, but in this case, it is for the aggregate market.
In the image, consumers are paying, $20, so the aggregate surplus is in blue.
What is the price elasticity of demand? flat vs. steep curve?
The % change in quantity demanded relative to the percentage change in price. Flat ciurve is very elastic, steep curve not so much.
How is price elasticity calculated WHEN DEMAND IS LINER and outputs interpreted?
- >1 Elastic
- <1 inelastic
- = 1 uni-elastic
What goods would be highly elastic?
Those that have many substitutes
How is the two-point elasticty formual calculated? when would this be used?
Used when only have two points in the demand curve and used the mid-point because % change when going up is different from when it goes down.
Contrast the regular point elasticity formula to the two-point formula.
- Two-point formula: Only provides a rough estimate of the elasticity, the larger the changes in P and Q, the lower the quality of the estimate
- Point elasticity formula: Good for small changes in price
Economist can use the concept of elasticity with any of the sisters in the function (Substitute, complement, income, etc.)
What would income elasticity and corss-price elasticity look like?
