branch of economics that examines individuals’ choices concerning 1 product/firm/industry.
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Transcript of branch of economics that examines individuals’ choices concerning 1 product/firm/industry.
branch of economics that examines individuals’ choices concerning 1 product/firm/industry
quantities (Q) of a good that consumers are willing and able to purchase at various prices (P) during a given period of time
table listing the quantities demanded (QD) at various prices (P)
graph of the relationship b/t the price (P) of a good and the quantity demanded (QD)
D = demand neg. slope
P = prices Y-axis
Q = quantities X-axis
the QD of a good will be greater at lower P than will the QD at higher P (ceteris paribus)
inverse relationship b/t P and Q
1. diminishing marginal utility2. income effect3. substitution effect
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
as additional units of a product are consumed, the additional satisfaction starts to
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MU = ΔTU/ ΔQ
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 QD because your additional satisfaction diminishes as you demand more
effect that or P has on buying power of income
P = buying power (income seems )
P = buying power (income seems )
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
Example: If P of butter , you will buy margarine instead. QD of butter .
market demand schedule/curve: P and QD for all consumers of a good combined (the market)
same principles apply to market as individuals
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Demand
change in quantity demanded (ΔQD) 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
INCREASE = shift to RIGHT DECREASE = shift to LEFT
1. Income2. Tastes & preferences3. Prices of related goods4. Expectations of future prices5. Population size
inferior goods: demand as personal income (“Spam effect”)
normal goods: demand as personal income
…what happens to your demand for filet mignon?
… what happens to their demand for filet mignon?
… for Spam?
The “Friends” Haircut
Hybrids, especially the Toyota Prius
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
… what happens to demand for margarine?
… what happens to demand for jelly?
future ΔP and current ΔD move in the same direction
Ex. speculative buying. Google stock? H20 before a hurricane
pop. D pop. D
Ex. baby boomers hit retirement demand for health care services
responsive of consumers’ QD to price changes
price elasticity of demand = %ΔQD / %ΔP
%ΔQD = |Q2 – Q1| / Q1
%ΔP = |P2 – P1| / P1
> 1 price elastic(responsive)
< 1 price inelastic(not very responsive)
= 1 unitary elastic
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)
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)
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
Gasoline is inelastic Restaurant meals are elastic
Inelastic Estimated Elasticity of Demand
Salt; matches; airline travel, short-run
0.1
Gasoline 0.2 (short-run), 0.7 (long-run)
Physician services 0.6
Approximately Unitary Elasticity
Movies 0.9
Private education 1.1
Tires, long-run 1.2
Elastic
Restaurant meals 2.3
Airline travel, long-run 2.4
Fresh tomatoes 4.6Source: http://www.mackinac.org/article.aspx?ID=1247
total amount of money a company receives from sales of a product
TR = P x Q
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
price change has effect on total revenue
typical goal: price change should not decrease total revenue
Elastic Demand
Inelastic Demand
P TR P TR
P TR P TR
Should manufacturers reduce the price to $250?
TR1 = ($300)(2,000) = $600,000
TR2 = ($250)(2,500) = $625,000
YES, because total revenue increases.