Ch. 4 Demand

Question 1

What is the economic theory?

Answer 1

Collection of models of simplified representations of economic reality to help understand a variety of economic issues.

Question 2

Ceteris Paribus means…

Answer 2

All other thing equal

-set aside other relevant factors as unchanged

Question 3

Demand

Answer 3

The desire, ability, and willingness to buy a product

Question 4

Demand Schedule

Answer 4

Table that shows the quantities of a good/service that a person will purchase at each price.

Question 5

Demand Curve

Answer 5

A graph of a demand schedule

Question 6

Law of Demand

Answer 6

As price falls, quantity demanded rises. As price rises, quantity demanded falls. Inverse relation.
Exception: Luxury and skin care due to social value and quality

Question 7

What are the 3 behavior patterns of consumers that results in the law of demand?

Answer 7

1) Income Effect
2) Substitution Effect
3) Diminishing Marginal Utility

Question 8

Income Effect

Answer 8

A change in price alters consumer’s purchasing power. As the price falls, buyers can afford more thus quantity increases.

Question 9

Substitution Effect

Answer 9

Consumers react to a good’s price by switching to a similar product if the price is too high.

Question 10

Diminishing Marginal Utility

Answer 10

The more we consume of something, the less satisfaction we get from it. Only buy extra if price falls accordingly.

Question 11

Change in Demand

Answer 11

The entire demand curve shifts thus creating a new demand curve. A shift to the right means increase in demand; a shift to the left shows a decrease in demand.

Question 12

Determinants of Demand

Answer 12

Non-price conditions that influence a consumer’s willingness and ability to demand a good.

Question 13

What are the determinants of demand?

Answer 13

Preference and Taste
Related Goods
Income
Consumers (# of buyers)
Expectation of Buyers
Substitutes

Question 14

What is preference and taste?

Answer 14

It is how we view products. It can relate to trends, ads, news, and other social media.

Question 15

What is related goods?

Answer 15

Complementary products (the use of one increases the use of the other)

Question 16

What is income (in terms of a determinant)?

Answer 16

Income of consumers changes the demand but depends on type of goods.

• Normal Goods: Income goes up, demand goes up (luxuries)
• Inferior Goods: Income goes up, demand goes down (Top ramen, used cars)

Question 17

What is consumers (in terms of a determinant)?

Answer 17

The population and target demographics.

Question 18

What is the expectation of buyers?

Answer 18

Future prices, shortages, surpluses, and new technology.

Question 19

What are substitutes?

Answer 19

When the price of one item changes, consumers will switch to a similar but cheaper good. (No difference)

Question 20

Change in Quantity Demanded

Answer 20

More or less units of a good is demanded because the price changes (Law of Demand)

Question 21

Change in Demand

Answer 21

The demand curve has shifted indicating an increase/decrease at all price levels (Determinants of Demand)

Question 22

Price Elasticity of Demand

Answer 22

How responsive demand is to a change in price

Question 23

Elastic Demand

Answer 23

A change in price cause of a change in quantity demanded (very responsive, gradual slope)

Question 24

Inelastic Demand

Answer 24

A change in price has a very small effect on a quantity demanded (not responsive, steep slope)

Question 25

What does a perfectly inelastic demand look like?

Answer 25

A vertical line. These are live or die goods.

Question 26

What factors affect the elasticity of demand?

Answer 26

1) Necessity verus luxury. If needed, good is inelastic.
2) If substitutes available, then elastic. If few substitutes then inelastic.
3) Is there time for consumers to adjust to price changes? Inelastic for short time.
4) Does the purchase use a large portion of one’s income? Income effect used here. Price usually affects poor more than wealthy.

Question 27

How do you calculate elasticity?

Answer 27

% change of quantity / % change of price
original - new / original  x 100
- E > 1 = elastic
- E = 1 = unit elastic
- E < 1 = inelastic

Question 28

What is unit elastic?

Answer 28

Quantity demanded changes by the same % as price does.

Question 29

Why does elasticity matter?

Answer 29

A firm’s total revenue is related to the price elasticity of demand.

• elastic = sell more at lower price
• inelastic = make money by sell at higher price even if quantity demanded falls

Question 30

What is the total revenue test?

Answer 30

TR = P x QD

• P & R move in same direction -> inelastic
• P & R move in opposite direction -> elastic