Exam (elaborations)
HBX CORE FINANCIAL ACCOUNTING
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HBX CORE FINANCIAL ACCOUNTING
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HBX COREFINANCIAL
ACCOUNTING
What is Willingness to Pay (WTP)?
Willingness to pay is the maximum amount of money a customer is willing to pay for a
product or service.
What happens if the price of a product is higher than a consumer's WTP?
That consumer will not purchase the product.
What are some observable factors that influence WTP?
income, gender, age, etc.
What are some not-easily observable factors that influence WTP?
Consumer's intrinsic preference for the product, substitutes and complements to the
product, and so on.
What does a demand curve for an individual buyer summarize?
That consumer's willingness to pay for various quantities of a product.
What are on the x and y axes of a demand curve graph?
y-axis: Price
x-axis: Quantity demanded
How can a firm calculate revenue corresponding to different prices using a demand
curve?
price*quantity demanded (or the area under a demand curve)
,Demand curves slope _________wards. Why?
Downwards.
A consumer will have a higher WTP for the first unit of a product, but a lower WTP for
subsequent units. This is due to "diminishing marginal returns."
What is diminishing marginal returns?
An economic relationship stating that a consumer's willingness to pay for a product
should decrease for additional units of a product (i.e. the tenth milkshake will not taste
as good as the first).
What causes shifts in the demand curve?
Changes in consumer willingness to pay result in shifts of the demand curve.
An increase in consumer WTP for a product will result in a shift of the demand curve
_____
Outward
A decrease in consumer WTP for a product will result in a shift of the demand curve
_____
Inward
What type of factors that affect WTP correspond to shifts in the demand curve?
Non-price factors
What is the difference between slope and shifts in a demand curve?
Slope: Changes in price correspond to movements along the demand curve.
Shifts: Non-price factors that affect WTP correspond to shifts in the demand curve
(inward or outward).
What does the slope of a market demand curve measure?
How responsive buyers are to changes in price. When the curve is flat or near-flat, a
small dip in price sparks a large surge in the quantity demanded. When the curve is
steep or vertical, changes in price have little impact on the quantity demanded.
Demand is typically more [elastic or inelastic] if a product is a luxury rather than a
necessity, or if the product has many substitutes.
Elastic
Steep curves are often called [elastic or inelastic]
Inelastic
, Flat curves are often called [elastic or inelastic]
Elastic
What is an important advantage of the elasticity measure over a slope measure?
Elasticity is a unit-less measure: it doesn't change as the units used to measure quantity
demanded change. As a result, one can also more easily compare the elasticities of
demand for different products; slopes do not enjoy this property.
Is elasticity the same or different at each point on a demand curve with constant slope
(i.e., a straight-line demand curve)?
Difference, however, that demand curve as a whole could be colloquially called "elastic"
or "inelastic" depending on how flat or steep its slope is.
What does the income elasticity of demand measure?
How sensitive quantity demanded is to a change in consumers' income.
What are some kinds of elasticity one can measure?
"income elasticity of demand", "advertising elasticity of demand", or any other kind of
elasticity.
Price elasticity of demand tends to _______ as price _________.
Increase; Increases
Price elasticity of demand for a particular product will tend to __________ as more
substitute goods become available.
Increase
Price Elasticity of Demand (PED)
A measure of how responsive customer demand for a product or service is to a change
in price.
Absolute value of: % change in qty demanded / % change in price
% change formula = (new # - original #)/ original #
If demand were elastic, a price increase would decrease revenues.
If demand were inelastic, a price increase would increase revenues.
What types of product have a negative income elasticity of demand?
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