Chapter 7- Consumer Choice and Elasticity

Factors:
1.limited income nesccessitates choice 2.consumers make choices purposefully 3.One good can be sub. for another. 4.Consumers make decisions without perfect information, but knowledge and past experience will help.5.Law of diminishing marginal utility:As the rate of consumption increases, the marginal utility derived from consuming additional units of a good will decline.

-the demand curve shows the amount of a product consumers would be willing to buy at different prices for a specific period. The law of demand states that there is an inverse relationship between the quantity of a product purchased and its price. Reasons that demand curves slopes downward: Substitution effect: as a product’s price falls, the consumer will buy more of it and less of the other, now more expensive, products. Income effect: as a product’s price falls, a consumer’s real income rises and so induces the individual to buy more of both it and the other goods.

-The monetary price of a good is not always a complete measure of its cost to the consumer.
Consumption of most goods requires time as well as money. Like money, time is scarce to the consumer. So, a lower time cost, like a lower money price, will make a product more attractive. Time costs, unlike money prices, differ among individuals.

The market demand curve is merely the horizontal sum of the individual demand curves. the market demand curve will slope downward to the right, just as the indiv. demand curves do.

After calculating the price elasticity of demand, you can determine whether it is elastic, inelastic, or unitary elastic with the following: if the absolute value of the elasticity term < 1, therefore inelastic if AV >1, then the demand is elastic. if the av =1, unitary elastic because price elasticity of demand is always negative, the sign on the coefficient is often omitted in discussions of elasticity.

Percentage Change in Quantity Demanded / Percentage change in price.

Availability of substitutes: the most important determinant of the price elasticity of demand. When good substitutes for a product are available, a price increase induces many consumers to switch to other products. Demand is elastic.
Product's Share of the Consumer Total Budget

The percentage change in the quantity of a product demanded divided by the percentage change in consumer income that caused the change in quantity demanded. It measures the responsiveness of the demand for a good to a consumer's change in income.

A good that has positive income elasticity, so that, as consumer income rises, the demand for the good falls.

A good that has negative income elasticity, so that, as consumer income rises, the demand for the good falls.

The percentage of change in quantity supplied, divided by the percentage change in the price that caused the change in quantity supplied.