Vocab
A good whose consumption increases as consumer income goes down.
Inferior Good
You just took an Uber from home to campus for the first time and were willing to pay $13 for the trip. It was so much easier than driving yourself that you are willing to pay $21 for the same trip tomorrow.
Determine if you have violated the law of demand based on your choices, and why or why not that is the case.
No - because your preference for the product changed after you experienced the good.
Change in demand or change in quantity demanded?
Which direction?
Cause: Kanye made people madder than usual
Good: Kanye albums
Change in demand - consumer preference change - the curve will
Direction - Shift Left
In general, when incomes rise, individuals are more likely to travel by air than by car when they take vacations. Use economic terms to explain this!
Air and car travel are Substitute Goods. Consumer income rise shifts the demand curve for air travel right and the substitution effect causes car travel to shift left (this may be reflected in gas prices at the pump, or we could look at toll road demand, etc.)
Avian flu and other factors have caused a decrease in the egg supply, resulting in higher prices at the store. What will happen to the demand curve for eggs?
Consumers will purchase fewer eggs, this is shown as a movement along the demand curve to the left.
Define Substitute Goods
Substitute goods are those whose consumption has an inverse relationship, that is they are relatively interchangeable and exclusionary - you replace one with the other rather than consuming them together or independent of one another.
Determine whether the good is a normal good or an inferior good for the average consumer.
Good: iPhone
Normal
Change in demand or change in quantity demanded?
Which direction?
Cause: Baby boomers decide to stay home due to concerned about Covid exposure.
Good: movie tickets
Change in Demand (population in the market)
Shift left
Coke and Pepsi can be viewed as ___________.
Substitute Goods
Market Demand is calculated by adding the individual demand curves:
A - Vertically
B - Horizontally
B - Horizontally
Define Complement Goods
Goods that are consumed together, an increase in the consumption of one will cause an increase in the demand for the other.
(the demand for the two goods has a positive linear relationship)
Consider the following statement: “An increase in the cost of oil will cause the price of a plane ticket to increase. This increase in price will cause a decrease in demand for airline travel and a leftward shift in the demand curve.”
What is the flaw in this reasoning?
An increase in the price of a ticket will not cause a decrease in demand, but rather a decrease in quantity demanded.
Change in demand or change in quantity demanded?
Which direction?
Cause: A new study shows that eating grapes leads to increased intelligence, endurance and reduced stress.
Good: Grapes
Change in demand, Right
When quantity demanded decrease in response to a change in price:
A - the demand curve shifts to the right
B - the demand curve shifts to the left
C - there is movement left along the demand curve
D - there is movement right along the demand curve
C - there is movement left along the demand curve
How is market demand determined?
Aggregating the individuals demand curves - add them horizontally
all things held equal
Ceteris Paribus
Your team launches a viral advertising campaign that is so successful that all existing consumers increase their willingness to pay by $100, and 50 new customers demand flights at every price.
What happens to the demand curve and why did it happen?
The demand curve shifts right (by $100 and then again by a quantity of 50). Consumers experienced a preference change at scale.
Change in demand or change in quantity demanded?
Which direction?
Cause: Sugar crops are unexpectedly productive due to excellent weather
Good: Sugar
Change in quantity demanded
Movement along the curve to the right
Andy views beer and pizza as complements to one another. IF the price of pizza decreases, economists would expect Andy's consumption of beer to:
Increase - since beer and pizza consumption are complements, they move along the demand curve in tandem (together, in the same direction). Since pizza's price decreased, we can assume that Andy will follow the law of demand and increase consumption. As his pizza consumption increases, so will his beer consumption.
BONUS REVIEW ROUND -
Name & Explain or Define the Four Core Principles
Benefit-Cost - To get something, something else is given up (it doesn't have to be money!) - Trade offs! No free lunch!
Opportunity Cost - The NEXT best alternative
Marginal Principle - There is a changing ratio of benefits to costs
Interdependence - Decisions are inter-related, firms must take the actions of other firms into account when making decisions and they will be affected by the decisions made by other firms
The Law of Demand
Conditional on all else being equal, as the price of a good increases (↑), quantity demanded will decrease (↓); conversely, as the price of a good decreases (↓), quantity demanded will increase (↑).
When Sony released the PlayStation 4, it was reported that Sony was taking a loss of $60 on every PS4. However, Sony expected to make this up with sales of PS+ subscriptions and increased royalties from video games. Use the interdependence principle to help explain this strategy.
The PS+ subscriptions allow PS4 owners to play their games online, receive new games monthly to download at no charge, and receive additional special discounts on other items. Therefore, the PS4 and PS+ subscriptions are ______________.
Complements
Change in demand or change in quantity demanded?
Which direction?
Cause: In the small town of Jasper, a new business opens which pays workers twice as much as other employers and it is so successful that it can employ the entire town.
Good: Restaurant Meals
Demand shift, right
Consumer incomes have increased.
If an increase in the price of good X causes a decrease in the demand for good Y, we can conclude that:
Good X & Y are complement goods -
- the increased price of good X reduces the quantity demanded.
- Good Y saw a demand curve decrease as a result implying that they are goods that are consumed together - that is they increase or decrease together, in the same direction, making them complement goods!
Name 4 Factors that shift the demand curve rather than moving along it?
Price of RELATED goods (compliments & substitutes)
Expectations/Known Information
Preference/Taste
Income of consumers
Consumer quantity - Population change