Chapter 3

Question 1

Define demand

Answer 1

Demand:
the relationship between various prices consumers pay for a good and the resulting quantities demanded at those prices

Question 2

Define the law of demand

Answer 2

Law of demand:
the inverse relationship between the price of a good and the quantity demanded of that good

Question 3

Recognize demand as a schedule

Answer 3

See Table 3.1

Question 4

Recognize demand as a graph

Question 5

Recognize demand as a linear equation

Answer 5

Demand equation in its standard form:
linear equation for demand written so that quantity demanded is a function of price (See the box below this definition)

Question 6

Interpret demand as marginal benefit

Answer 6

The y coordinate of the demand curve (“price”) at a given quantity reflects the marginal benefit to you of purchasing that box of cookies.

Question 7

Calculate marginal benefit given different representations of demand

Answer 7

This connection between the y coordinate of demand curves and the marginal benefit is a relationship you’ll see throughout our study of microeconomics. The slope–intercept equation for demand describes price (the y coordinate of demand) as a function of quantity, and that equation can also be interpreted as a marginal benefit equation. In our example, P =7 − (1/5)Qd, so that equation will also be rewritten as MB = 7 − (1/5)Qd. Using that equation, the marginal benefit of the fifth box of cookies would be $6, which is confirmed in Figure 3.2.

The negative slope of demand also implies that the marginal benefit tends to decline as you consume more cookies. If you’ve already eaten several boxes of Thin Mints this month, the value to you of yet another box is likely to fall. In our graph in Figure 3.2, the y coordinate of demand at the quantity of 5 was $6, but the y coordinate of demand at the quantity of 20 was only $3. This means that the fifth box of cookies provides a marginal benefit of $6, but the 20th box of cookies provides a marginal benefit of only $3.

Question 8

Categorize various influences on demand

Answer 8

Changes in income
Changes in prices of substitutes or complements in consumption
Changes in expectations of future prices
Changes in number of buyers
Changes in trends and preferences

Question 9

Evaluate impact of various influences on demand

Question 10

Define a normal good

Answer 10

Normal good:
a good for which demand rises when income rises and demand falls when income falls

Question 11

Define an inferior good

Answer 11

Inferior good:
a good for which demand rises when income falls and demand falls when income rises

Question 12

Define substitutes in consumption

Answer 12

substitutes in consumptionSubstitutes in consumption:
goods that consumers can use as alternatives to one another

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Question 13

Define Complements in consumption

Answer 13

Complements in consumption:
goods that are typically used together

Question 14

Give an example as to how changes in expectations about prices or income affect demand

Answer 14

If the expected price of Thin Mints rises, current demand also rises and demand shifts to the right.

Question 15

Given an example of how changes in number of buyers affects demand

Answer 15

At any price, the quantity demanded where there are more buyers is likely to be higher than quantity demanded where there are fewer buyers (ceteris paribus). Increases in the number of buyers will increase demand (shift demand to the right), and decreases in the number of buyers will decrease demand (shift demand to the left).

Question 16

Give an example as to how changes in trends or preferences affects demand

Answer 16

fashion trends, health concerns, or corporate advertising