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Demand
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Relationship between the quantity that consumers wish to purchase and the factors that influence the demand
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Market demand
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The summation of the individual demand schedules in a market
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Why is the market demand important?
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If all individuals are not the same, the firm may be able to take advantage of different groups of the market through price discrimination which helps earn even more profits
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Market demand curve
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the horizontal summation of individual demand curves and it indicates total quantity all consumers would purchase at each price point
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Why is it important to be careful when summing different groups of people?
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Different groups of people can have different willingness to pay (WTP) - some groups drop out of the market completely if the price they face is too high
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Substitutes
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Two goods for which an increase in the price of one leads to an increase in demand for the other
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Complemenys
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Two goods for which an increase in the price of one leads to a decrease in demand for the other
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Normal good
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Good where an increase in income leads to an increase in the demand of that good
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Inferior good
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A good where an increase in income leads to a decrease in the demand of that good
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Elasticity
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A measure of the responsiveness of quantity demand or quantity supplied to one of its determinants - allows to make comparisons between different units
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own price elasticity of demand
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A measure of how much the quantity demanded of a good responds to a change in that goods price
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Elastic
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if the price elasticity of demand is greater than 1 or is large
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inelsatic
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If the price elasticity of demand is less than 1 or is small
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What does a linear demand curve mean for elasticity?
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Elasticity will vary as you move along the demand curve
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Factors affecting own price elasticity
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Available substitutes, time, expenditure share, necessity vs luxury.
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If cross price elasticity is greater than 0...
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Good x and good y are substitutes
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If cross price elasticity is less than 0...
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Good x and good y are complements
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Regression analysis
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Is a statistical technique used to estimate the relationship between a dependent variable and explanatory variables
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Inverse Demand Function
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Price is a function of quantity; to the left is the dependent variable; to the right is the explanatory variable; is the random error - the sign must be negative
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Ordinary Least Squares (OLS)
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Is the most common regression method - if fits the line to minimize the sum of the square residuals.
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Correlation vs. Causation
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Two variables are CORRELATED if they move together. However, correlation does NOT necessarily imply causation
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