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Managerial Economics
Demand Analysis
40
Economics
Graduate
09/02/2013

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Term




Demand

Definition

The willingness and ability of buyers to purchase different quantities of a good (including service) at different prices during a specific time period.

Term
Law of Demand
Definition

As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus.

Term
Demand Schedule
Definition

The numerical tabulation of the quantity demanded of a good at different prices.  A demand schedule is the numerical representation of the law of demand.

Term
Demand Curve
Definition

The graphical reprensentation of the law of demand.  Usually downward-sloping.

Term
Law of Substitution
Definition

People substitute lower-priced good for higher-priced goods.

Term
Law of Diminishing Marginal Utility
Definition

For a given period, the marginal (additional) utility (satisfaction) fained by consuming equal successive units of a good will decline as the amount consumed increases.

Term
Quantity Demanded
Definition

The number of units of a good that people are willing and able to buy at a particular price.

Term
Change in the Quantity Demanded
Definition

A movement from one point to another point on the same demand curve caused by a change in the price of the good.

Term
Change in Demand
Definition

Demand is represented by the entire demand curve.  Change in demand is a change or shift in the entire demand curve.

Term
Increase in Demand
Definition

An increase in demand is represented by a rightward shift in the demand curve and means that individuals are willing and able to buy more of a good at each and every price.

Term

Decrease in Demand

Definition

A decrease in demand is represented by a leftward shift in the demand curve and means that individuals are willing and able to buy less of a good at each and every price.

Term
Factors that cause a Demand Curve to shift
Definition
  1. Income
  2. Preferences
  3. Prices of related goods
  4. Number of buyers
  5. Expectation of future price

Note:  Any factor other than price.

Term
Normal Good
Definition

A good the demand for which rises (falls) as income rises (falls).

Term
Inferior Good
Definition

A good the demand for which falls (rises) as income rises (falls).

Term
Neutral Good
Definition

A good the demand for which does not change as income rises or falls.

Term
Substitues
Definition

Two goods that satisfy similar needs or desires.  If two goods are substitutes, the demand for one rises (falls) as the price of the other rises (falls).

Examples: Butter and Margarine, Coke and Pepsi.

Term
Complements
Definition

Two goods that are used (consumed) jointly.  If two goods are comlements, the demand for one rises (falls) as the price of the other falls (rises).

Term
Supply
Definition

The willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific period.

Term
Law of Supply
Definition

As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of a good falls, ceteris paribus.

Term
Supply Curve
Definition

The graphical representation of the law of supply.  Usually Upward-sloping.

Term
Supply Schedule
Definition

The numerical tabulaton of the quantity supplied of a good at different prices. A supply schedule is the numerical representation of the law of supply.

Term
Factors that cause a Supply Curve to shift
Definition
  • Prices of relevant resources
  • Technology
  • Number of sellers
  • Expectations of future price
  • Taxes and Subsidies
  • Government restrictions

Note: Like in the case of demand curve all factors other than price.

Term
Equilibrium
Definition
  • Equilibrium means "at rest".
  • Equilibrium in a market is the price-quantity combination for which there is no tendency for buyers or sellers to move away.
  • Graphically, equilibrium is the intersection point of the supply and demand curves.
  • Manually beneficial trade between buyers and sellers drives the market to equilibrium.
Term
Equilibrium Price
Definition

The price at which the quantity demanded of a good equals supplied.

Term
Equilibrium Quantity
Definition

The quantity that corresponds to equilibrium price. The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount bought and sold.


Demand and supply together establish equilibrium price and equilibrium quantity.

Term
Disequilibrium
Definition

A state of either surplus or shortage in a market.

Term
Disequilibrium Price
Definition

A price other than the equilibrium price.  A price at which quantity demanded does not equal quantity supplied.

Term
Surplus (Excess Supply)
Definition

A condition in which quantity supplied is greater than quantity demanded.  Surplus occurs at prics above equilibrium price.

Term
Shortage (Excess Demand)
Definition

A condition in which quantity demanded is greater tha quantity supplied.  Shortages occur only at prices below equilibrium price.

Term
Consumers' Surplus
Definition

The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. 


CS=Maximum buying price - Price Paid


The more consumers' surplus that buyers receive, the better off they are.

Term
Purchasers' (sellers') Surplus
Definition

The difference between the price sellers receive for a good and the minimum price for which they would have sold the good.


PS=Price received - Minimum selling price


The more producers' surplus that sellers receive, the better off they are.

Term
What can change equilibrium price and quantity?
Definition

Demand rises (the demand curve shifts rightward), and the supply is constant (the supply curve does not move). Equilibrium prices rises, and E quantity rises.
Demand falls, supply is constant.  E price falls, E quantity falls.
Supply rises, demand is constant.  E price falls, E quantity rises.
Supply falls, demand is constant.  E price rises, E quantity falls.
Demand rises and supply falls by and equal amount.  E price rises, E quantity is constant.
Demand falls and supply rises by an equal amount.  E price falls, E quanty is constant.
Demand rises by a greater amount than supply falls.  E prices rises, E quanity rises.
Demand rises by a lesser amount than supply falls. E P rises, E Q falls.

Term
Price Ceiling
Definition

A government mandated maximum price above which legal trade cannot be made.  If a price ceiling is below the Equilibrium price, some or all of the following effects arise: shortages, fewer exchanges, non-price rationing devices, buying and selling at prohibited prices, and tie-in sales. P C policies intended to help the poor may cause shortages and  the use of non-price rationing devices

Term
Price Floor
Definition

A government mandated minimum price.  If a price floor is above the equilibrium price, the following effects arise: surplus and fewer exchanges.

Term
Price Elasticity of Demand
Definition

A measure of the responsiveness of quantity demanded to changes in price.

 

Ed = % change in quantity demanded

        % change in price

 

Elasticity is not slope.

Term
Elasticity Demand
Definition

The perecntage change in quantity demanded is greater than the percentage change in price.


Ed > 1

Term
Inelasticity Demand
Definition

The percentage change in quantity demanded is less than the percentage change in price.


Ed < 1

Term
Unit Elastic Demand
Definition

The percentage change in quantity demanded is equal to the percentage change in price.


Ed = 1

Term
Perfectly Elastic Demand
Definition

If quantity demanded is extremely responsive to changes in price, demand is perfectly elastic.  For example, buyers are willing to buy all units of a seller's goods at $5 per unit, but nothing at $5.10.  A small percentage change in price causes an extremely large percentage change in quantity demanded (from buying all to buying nothing).


Ed=

Term
Perfectly Inelastic Demand
Definition

Quantity demanded does not change as price changes.

                   Ed =0


In real world no demand curves are perfectly elastic (horizontal) or perfectly inelastic (vertical) at all prices.  However, few real-world demand curves do approximat the perfectly elastic and inelastic demand curves.

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