Demand Flashcards
(41 cards)
What is the definition of utility in consumer demand theory?
Utility refers to the satisfaction or pleasure derived from consuming goods and services.
Utility can be total, marginal, cardinal, or ordinal.
What does the law of diminishing marginal utility state?
As more units of a commodity are consumed, the additional satisfaction from each unit decreases.
This is shown by the diminishing slope of the total utility curve.
What are indifference curves?
Indifference curves represent combinations of two goods that yield the same level of satisfaction to the consumer.
Consumers are indifferent between any two combinations on the same curve.
What is consumer equilibrium using the marginal utility approach?
Consumer equilibrium occurs when marginal utility equals price (MU = P).
This condition must hold for each good consumed.
How does the indifference curve approach explain consumer equilibrium?
Consumer equilibrium occurs where the budget line is tangent to the highest indifference curve reachable by the consumer.
This indicates maximum utility given the consumer’s budget.
What are the income and substitution effects of a price change?
Income effect: change in purchasing power due to price change. Substitution effect: change in quantity demanded due to relative price changes between goods.
Together, they explain consumer behavior in response to price changes.
Define effective demand.
Effective demand is the desire for a good backed by the ability and willingness to pay for it.
It contrasts with desired demand, which is a preference without the capability to acquire.
What are normal, inferior, and Giffen goods?
Normal goods: demand increases with income. Inferior goods: demand decreases with income. Giffen goods: demand increases as the price rises, due to the stronger income effect.
All Giffen goods are inferior, but not all inferior goods are Giffen.
What is the difference between shifts of the demand curve and movements along the curve?
Shifts of the demand curve occur due to changes in non-price factors, while movements along the curve occur due to price changes.
For example, consumer income or preferences can shift the entire curve.
Identify factors that affect demand.
- Consumer income
- Prices of related goods
- Consumer preferences
- Expectations of future prices
- Number of consumers
These factors can cause shifts in the demand curve.
What is consumer surplus?
Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.
It represents the benefit to consumers from participating in the market.
What is price elasticity of demand?
Price elasticity of demand measures how much the quantity demanded of a good responds to a change in its price.
It can be elastic, inelastic, or unitary.
What are the types of elasticity of demand?
- Price elasticity
- Income elasticity
- Cross elasticity
Each type measures different aspects of consumer responsiveness.
How do you calculate numerical values of elasticity?
Elasticity = (% Change in Quantity Demanded) / (% Change in Price).
This formula applies to all types of elasticity.
What are the implications of price elasticity of demand for total spending and revenue?
- Elastic demand: price decrease increases total revenue.
- Inelastic demand: price increase increases total revenue.
Understanding elasticity helps businesses set pricing strategies.
What factors determine the price elasticity of demand?
- Availability of substitutes
- Necessity vs luxury
- Proportion of income spent
- Time period for adjustment
These factors influence how sensitive consumers are to price changes.
Fill in the blank: The total utility is the combined utility obtained from the consumption of a number of units of a good or service, while marginal utility is the _______.
[extra utility obtained from the consumption of the last unit of a good or service]
True or False: The law of demand states that as the price of a good increases, the quantity demanded decreases.
True
This is based on the ceteris paribus assumption.
What is the relationship between total utility and marginal utility?
Total utility increases with consumption, but marginal utility decreases as more units are consumed.
This is illustrated by the diminishing marginal utility curve.
What is the significance of the point of tangency between the budget line and the indifference curve?
It represents the optimal consumption bundle where the consumer maximizes utility given their budget constraint.
This point indicates the best combination of goods the consumer can afford.
Define the demand schedule.
The demand schedule is a tabular representation showing the relationship between the price of a commodity and the quantity demanded.
It illustrates the law of demand through price changes.
What is the quantity of a good or service that consumers are willing and able to purchase at a given price called?
Demand
Demand is influenced by various factors including price, income, and consumer preferences.
What does a demand schedule represent?
A tabular representation of the relationship between the price of a commodity and the quantity demanded
The demand schedule shows how quantity demanded changes as price changes.
What is the shape of the demand curve?
Downward sloping
This reflects the negative relationship between price and quantity demanded.
