Chapter 2 Flashcards
Every economy must somehow solve three basic economic
problems:
- what should be produced,
- how goods and services
should be produced, and - for whom are the goods and services produced.
It is a theory that explains the interaction between the
sellers of a resource and the buyers for that resource. The
theory defines the relationship between the price of a given
good or product and the willingness of people to either buy or sell it.
The law of supply and demand
True or False: As price increases, people are willing to supply more and demand less and vice versa when the price falls.
It is a mechanism through which buyers and sellers interact in order to determine the price and quantity of goods and services.
Market
It is the value of goods and services in terms of money. In the market system, it serves as a signal to both the producers and the consumers.
Price
It is the amount of goods and services that the consumers/
buyers are willing and able to purchase.
Additionally, it is the number or amount of goods and services desired by the consumers at
various prices in particular period of time.
Demand
It is the amount of goods and services that the consumers/ buyers are willing and able to purchase at a particular time,
place, and price.
Quantity Demand (Qd)
Justification for the law of demand
- Income effect
- Substitution effect
“As the price increases quantity demanded decreases, and as the price decreases quantity demanded increases, if other factors remain constant
(ceteris paribus)”.
Law of Demand
It deals with functional relationship between price and the quantity demanded. The word “_____” refers to an observed regularity in all market.
Law of demand: “law”
When the price of goods decreases, the consumer can afford to buy more of it and vice versa. This simply implies that at a lower price, the
consumers have greater purchasing power.
Income effect
It is expected that the consumers tend to buy goods with a lower price. Hence, in case that the price of goods that consumers buy increases, they look for substitutes with lower price.
Substitution effect
Determinants of Demand
- Income (Normal and Inferior Goods)
- Price Expectation
- Price of Related Products (Substitute Product and Complementary Goods)
- No. of consumers
- Taste and Preference
- Range of the available goods
A change in income will cause a change in demand. The direction in which the demand will change in response to a
change in income depends on the following type of goods:
Income
Refers to a good for which demand at every price increases when income rises or vice versa. Example would be
goods that are considered as part of our basic necessities such as rice, utilities (electricity and water), medical and dental services.
Normal Goods
Refers to a good for which demand falls when income rises and vice versa. Public transportation is a good
example- as income of passenger in Manila increase significantly, they tend to reduce consumption for the service of public utility
vehicles as a mode of transportation and instead drive their own cars.
Inferior Goods
The quantity of good demanded within the period
depends not only on price in that period but also on
prices expected in future periods. When someone
expect higher prices in the future especially for the
price of gasoline, the tendency for car owners is to buy more gasoline immediately (panic buying) to maximize the purchasing power of their money. In the same manner. Demand for gasoline decreases if car owners expect prices to decline in the future.
Price Expectation
The demand for any particular
good will be affected by changes in the prices of related goods. The direction in which the demand will change in prices of related products depends on the following relationship of products:
Price of related products
Goods that can be used in place of other goods. They are related in such a way that an increase in the price of one good causes an increase in the demand for the other good or vice versa. For example, in 2008, the spike in the price of gasoline pushed some car owners to convert to Liquefied Petroleum Gas (LPG) as an alternative for the vehicles.
Substitute product
Goods that go together or cannot be used without the other. They are related in such a way that an increase in the price of one good will cause a decrease in the demand for the other good. For example, in the same year of 2008, the rise in the price of aviation fuel resulted to less travel by tourists in the country causing a decline in hotel occupancy.
Complementary goods
An increase in ______ ____ _______
means more demand for goods and services. Inversely, less
number of consumers means less demand for goods and
services. China is fast becoming economic super power as
investment are continuously flowing to their economy. The
main reason for this is its huge market of 1.8 billion that has
attracted investors from U.S. and Europe.
No. of consumers
Consumers’ _____ and ______
are major factors in determining the demand for any product. Religion, culture, traditions, and age are some of the factors that can affect them. As preference and taste become inclined for a certain product or vice versa. For example, Filipinos are becoming more health conscious and as a result, the demand for herbal supplements has increased substantially.
Taste and preference
When the number of available goods or commodities (with the same purpose) gets high, the total market demanded will be divided in each commodities.
Range of available goods
It is the representation of the relationship between demand and all of its determinants expressed in a mathematical language using functional form
Demand function
a demand relationship showing how quantity demanded (Qd) of the product is related to other variables that affect demand.
Generalized demand equation
as defined by J. Bruce Linderman, is Latin for “all else being equal”. The _____ ______ assumption says that none of the independent variables changes.
Ceteris Paribus
True or False: The functional relationship between price
and quantity demanded is essential since non-price
factors are assumed as constant. The Law of Demand
now states “Assuming all things constant, price and
quantity demanded are inversely proportional”
True
It shows the tabular representation of the relationship between the quantity of good demanded and the price of that good.
Demand Schedule
It shows graphically the relationship between the quantity of good demanded and its corresponding price, with other variables held
constant. It is typically downward sloping. It
describes the negative relationship between the price of the good and
the quantity that consumer want to buy at a given price.
Demand Curve
The downward sloping property of demand curve is referred to as the ____ __ ______ Thus, greater quantity will be
demanded when the price is lower, and when the price of goods increases, buyers
tend to buy less of them.
Law of Demand
It is due only to a change in
the price of goods and services. Graphically is represented
by a movement along a demand curve which indicates a
movement from one point to another point of the same
demand curve.
Movement along demand
It is bought the changes in the
non-price determinants of demand. It is graphically
represented by shifting from one demand curve to
another.
Change in demand
