2.1 markets-demand

Question 1

what determines price

Answer 1

the interaction of consumers and producers determine the price of each product

Question 2

definition of market

Answer 2

market: any arrangement where the buyers and sellers interact to carry out an economical transaction.

Question 3

definition of demand

Answer 3

demand: the relationship between various possible prices of a good and the corresponding quantities that consumers are willing and able to purchase per time period, ceteris paribus.

Question 4

law of demand

Answer 4

• the relationship between price and quantity per period of time is inverse. meaning that if the price increases, then quantity demanded will decrease as consumers will be willing and able to buy less per period.
• the law of demand states that if the price of a good rises, then the quantity demanded per period will fall, ceteris paribus.

Question 5

2 effects that explain why an increase in price follows with the decrease of quantity demanded.

Answer 5

substitution effect
income effect

Question 6

substitution effect

Answer 6

• if the price of a good rises, the good will now cost more than alternative or substitute goods.
• all other goods automatically become relatively cheaper and so people will tend to switch to said substitutes.

Question 7

income effect

Answer 7

• if a price of a good rises, consumers feel poorer as they are unable to buy as much of the good with their income.
• the purchasing power of their income(“real income”) falls and people tend to buy less of that good.

Question 8

law of diminishing marginal utility

Answer 8

a typical consumer has a fixed set of income and faces a fixed set of prices. we assume that consumers allocate their expenditures among all the goods and services that they might buy so as to gain the greatest possible utility. this means that the goal of typical consumers is to maximise their utility subject to their budget constraint(income)

• as one consumes additional units of a good per period, the additional satisfaction enjoyed decreases.
• individuals will be willing to pay less and less to buy more and more unit is of a good per period of time.

Question 9

utility

Answer 9

utility: a measure of the satisfaction derived from consuming a good or service

Question 10

marginal utility

Answer 10

marginal utility: the additional satisfaction / the extra or additional utility derived from consuming an additional unit of a good or service.

Question 11

demand curve(what it illustrates and purpose)

Answer 11

• the demand curve illustrates the relationship between the price of a good and the quantity of the good demanded over a period of time
• it can be for an individual consumer or more usually for the whole market.
• market demand derives from adding up at each price, the quantities demanded by all consumers in a market.

movement along the demand curve: when the price of the good changes

shift of the demand curve: when any of the non-price determinants of the demand curve changes.

Question 12

movement along demand curve

Answer 12

movement along the demand curve: when the price of the good changes

Question 13

shift in demand curve

Answer 13

shift of the demand curve: when any of the non-price determinants of the demand curve changes.

Question 14

non price determinants of demand (5 examples)

Answer 14

• are factors other than the good’s price that can affect demand.
• they are the factors assumed to be constant under the ceteris paribus assumption.
  e.g.
  income,
  price of related goods,
  tastes and preferences,
  expectation of future price changes,
  number of consumers

Question 15

how does income affect demand

Answer 15

• income: when income increases, demand of _____(YED)
  
  • normal goods ^
  • inferior goods v
  • luxury goods ^

Question 16

how does price of related goods affect demand

Answer 16

• substitute goods: two goods are considered substitutions of they are in competitive consumption and consumers typically buy one of the other as goods satisfy the same need
• complement goods: “ consumers together (“jointly consumed”), pb&j, coffee&sugar. increase in demand of one leads to increase demand of other.

Question 17

how does tastes and preferences affect demand

Answer 17

if good appears more attractive to customers as a result of advertising, fashion trends, or health considerations, then demand for that good will increase and the demand curve will shift to the right.

Question 18

how does the expectation of future price changes affect demand

Answer 18

if the price of a product is expected to rise in the future, then its demand will now increase and the demand curve will shift right

Question 19

how does number of consumers affect demand

Answer 19

if the number of consumers in a market increases, demand will increase and the demand curve will shift to the right, and vice verse.

Question 20

demand schedule

Answer 20

a table that shows the qty demanded of a good or service at different prices

Question 21

individual demand

Answer 21

demand of one person

Question 22

market demand

Answer 22

sum of all the individual demands for a good or service in a market at each price

Question 23

demand curve (what does it show +axes)

Answer 23

shows the inverse relationship between price and qty
y-axis -> price
x-axis -> qty

Question 24

characteristics of competitive market
(5)

Answer 24

• rivalry
• independent actions by buyers and sellers
• buyers compete wit one another (dollar votes)
• increased competition -> decrease in seller’s market power and control over price
• forces of supply and demand determines price

Question 25

assumptions underlying law of demand (3)

Answer 25

income effect
substitution effect
diminishing marginal utility

Question 26

real income

Answer 26

income of individuals or countries after adjusting for inflation (price level changes)

Question 27

substitute goods (2 kinds)

Answer 27

goods that have similar characteristics and uses to consumers

close substitutes and remote substitutes

Question 28

close substitutes

Answer 28

goods that have very similar characteristics and uses to consumers so that they will switch between them easily

Question 29

remote substitutes

Answer 29

goods that have less similar characteristics and uses to consumers. consumers switch between them less easily

Question 30

complements/complementary goods (def+2 kinds)

Answer 30

goods that are consumed together
close complements and remote complements

Question 31

close complements

Answer 31

goodsthat are consumed together, such that one good has little use without the other

Question 32

remote complements

Answer 32

goods that are sometimes consumed together, but consumption of one good does not depend on the other