1. Individual and Market Demand

Question 1

What is individual demand?

Answer 1

The quantity of a good or service a single consumer is willing and able to purchase at different prices.

Question 2

What is the substitution effect?

Answer 2

The change in consumption of a good due to a change in its price, making it more or less expensive relative to other goods.

Question 3

What is the income effect?

Answer 3

The change in consumption of a good resulting from a change in real income caused by a change in the good’s price.

Question 4

What is market demand?

Answer 4

The total quantity of a good that all consumers in a market are willing and able to buy at different prices.

Question 5

What is consumer surplus?

Answer 5

The difference between the maximum price a consumer is willing to pay and the actual price they pay.

Question 6

What are network externalities?

Answer 6

Effects where a consumer’s utility from a product increases as more people use the product.

Question 7

What is the price-consumption curve?

Answer 7

A curve that shows how the quantity demanded of a good changes as its price changes, holding other factors constant.

Question 8

What is the income-consumption curve?

Answer 8

A curve that shows how a consumer’s demand for goods changes as their income changes, holding prices constant.

Question 9

What are normal goods?

Answer 9

Goods for which demand increases as income rises.

Question 10

What are inferior goods?

Answer 10

Goods for which demand decreases as income rises.

Question 11

What are Engel curves?

Answer 11

Graphs that show the relationship between income and the quantity demanded of a good.

Question 12

What are substitutes?

Answer 12

Goods that can be used in place of one another; if the price of one rises, the demand for the other increases.

Question 13

What are complements?

Answer 13

Goods that are consumed together; if the price of one rises, the demand for the other decreases.

Question 14

What are Giffen goods?

Answer 14

A rare type of good where demand increases as its price rises, violating the basic law of demand.

Question 15

What is elasticity of demand?

Answer 15

The responsiveness of quantity demanded to a change in price, measured as percentage change in quantity divided by percentage change in price.

Question 16

What is inelastic demand?

Answer 16

Demand that is not very responsive to price changes; elasticity is less than 1.

Question 17

What is perfectly inelastic demand?

Answer 17

Demand where quantity demanded does not change as the price changes; elasticity is zero.

Question 18

What is perfectly elastic demand?

Answer 18

Demand where quantity demanded changes infinitely with any change in price; elasticity is infinite.

Question 19

What is unitary elastic demand?

Answer 19

Demand where the percentage change in quantity demanded is exactly equal to the percentage change in price; elasticity is 1.

Question 20

What is the statistical approach to demand estimation?

Answer 20

The use of statistical models and data to estimate the relationship between demand and its determinants, such as price and income.

Question 21

What is the formula for price elasticity of demand?

Answer 21

(ΔQ / Q) / (ΔP / P); where ΔQ is the change in quantity demanded, Q is the initial quantity, ΔP is the change in price, and P is the initial price.

Question 22

What is the formula for income elasticity of demand?

Answer 22

(ΔQ / Q) / (ΔI / I); where ΔQ is the change in quantity demanded, Q is the initial quantity, ΔI is the change in income, and I is the initial income.

Question 23

What is the formula for cross-price elasticity of demand?

Answer 23

(ΔQx / Qx) / (ΔPy / Py); where ΔQx is the change in quantity demanded of good X, Qx is the initial quantity of X, ΔPy is the change in price of good Y, and Py is the initial price of Y.

Question 24

What is the formula for consumer surplus?

Answer 24

1/2 * (Q * ΔP); where Q is the quantity demanded and ΔP is the difference between the highest price consumers are willing to pay and the market price.

Question 25

What is the linear demand function?

Answer 25

Q = a - bP; where Q is quantity demanded, P is price, a is the intercept, and b is the slope.

Question 26

What is the formula for total revenue?

Answer 26

TR = P * Q; where TR is total revenue, P is the price of the good, and Q is the quantity sold.

Question 27

What is the formula for the budget constraint?

Answer 27

I = Px * X + Py * Y; where I is income, Px and Py are the prices of goods X and Y, and X and Y are the quantities of the goods.

Question 28

What is the formula for Giffen goods demand?

Answer 28

Q = a + bP; where Q is quantity demanded, P is price, a is the intercept, and b is positive, indicating that demand increases with price.

Question 29

What is the formula for marginal utility?

Answer 29

MU = ΔTU / ΔQ; where MU is marginal utility, TU is total utility, and Q is the quantity of the good.

Question 30

What is the formula for the price-consumption curve?

Answer 30

PCC: Q1(P1) = f(Q2, P1); where Q1 is the quantity of the good whose price is changing, P1 is its price, and Q2 is the quantity of another good.

Question 31

How does the income effect influence the demand for normal goods?

Answer 31

As income increases, the demand for normal goods increases because consumers have more purchasing power to buy higher quantities.

Question 32

How does the substitution effect explain changes in demand when the price of a substitute good falls?

Answer 32

When the price of a substitute falls, the substitution effect leads consumers to buy more of the cheaper substitute and less of the original good, decreasing its demand.

Question 33

How can the Engel curve be used to distinguish between normal and inferior goods?

Answer 33

For normal goods, the Engel curve slopes upwards as income rises, while for inferior goods, the Engel curve slopes downwards after a certain income level.

Question 34

What impact do network externalities have on the demand curve for a product?

Answer 34

Network externalities can shift the demand curve outward, as more consumers buying or using the product increases its value, leading to higher demand at each price level.

Question 35

How does the concept of elasticity of demand help businesses in pricing strategy?

Answer 35

Elasticity of demand helps businesses understand how sensitive consumers are to price changes; for elastic demand, small price increases may lead to significant drops in sales, while inelastic demand suggests price increases won’t significantly reduce sales.

Question 36

How would a rise in income affect the demand for a Giffen good, considering both income and substitution effects?

Answer 36

For a Giffen good, the substitution effect would typically reduce demand as the price rises, but the income effect is so strong that it leads to higher demand because the good behaves like an inferior good with increased consumption at higher prices.

Question 37

How do changes in the price of complementary goods affect the price-consumption curve of a product?

Answer 37

A rise in the price of a complementary good would shift the price-consumption curve downward, as the demand for both goods would decrease, whereas a fall in the price of a complement would shift the curve upward, increasing demand for both goods.

Question 38

In what way can the elasticity of demand determine the impact of a tax on consumer surplus?

Answer 38

If demand is inelastic, the tax will lead to a smaller reduction in quantity demanded and a relatively small loss in consumer surplus. For elastic demand, the same tax will cause a larger drop in quantity and a greater loss in consumer surplus.

Question 39

How can empirical demand estimation help predict the effects of a future price increase?

Answer 39

Empirical demand estimation uses past data to estimate the relationship between price and quantity demanded, helping to predict how a future price increase will affect total sales, consumer behavior, and revenue.

Question 40

How do inferior goods behave when income rises, and how can this be observed in the income-consumption curve?

Answer 40

For inferior goods, as income rises beyond a certain point, demand decreases, which can be observed as a downward slope in the income-consumption curve after a threshold income level is reached.

Question 41

How would you use both the substitution and income effects to explain why a price increase in a normal good reduces quantity demanded?

Answer 41

The substitution effect causes consumers to switch to relatively cheaper alternatives, reducing quantity demanded, while the income effect makes the consumer feel poorer, reducing their overall purchasing power and further lowering demand.

Question 42

How can the concept of cross-price elasticity be applied to determine whether two goods are close substitutes?

Answer 42

By analyzing cross-price elasticity, if the elasticity value is significantly positive, it indicates that an increase in the price of one good leads to a substantial rise in the demand for the other, suggesting they are close substitutes.

Question 43

How would you analyze the impact of network externalities in shaping the market equilibrium for technology products?

Answer 43

Positive network externalities increase the value of the product as more people adopt it, shifting the demand curve rightward and raising both equilibrium price and quantity, potentially creating winner-takes-all market dynamics.

Question 44

How can the Engel curve be used to distinguish between short-term and long-term consumption patterns for luxury goods?

Answer 44

The Engel curve for luxury goods shows a steep rise in demand with income in the short term, but long-term analysis may reveal a saturation point where further increases in income do not significantly boost consumption.

Question 45

How would you apply the statistical approach to demand estimation in predicting the demand curve for a new product?

Answer 45

By collecting data on related products, market trends, and consumer behavior, the statistical approach can be used to estimate parameters such as price elasticity and income elasticity, allowing for the construction of a predictive demand curve for the new product.