Chapter 3 Flashcards
Why is our market economy called the “price system”
Because prices provide important information to both buyers and sellers
What is the “Willingness to Pay (WTP)”
the maximum amount one is willing and able to pay for a good/service
(the highest value that a consumer believes the good or service is worth)
What is the Law of Demand
As a price increases, quantity demand falls. As a price decreases, demand goes up
What is the Substitution Effect
When the price of a good decreases, consumers will buy more of this good and less of the alternative goods (which are now more expensive)
What is it called when the price of a good falls, less money is spent on that good, which gives us more money to spend on other goods or a larger quantity of the original good
The Income effect
What is a “Demand Curve”
A demand curve shows both the willingness to pay for any given quantity and what the quantity demanded will be at any given price
How do you calculate the market demand curve
by summing up individual demands
There are 5 factors that effects demand, what are they?
1) tastes and preferences
2) income
3) prices of related goods
4) number of buyers
5) availability of product
What are “Normal goods”
A good where if income increases, the demand for it will increase eg.brand name clothes
What is an inferior good
a good where if income increases, demand for it also decreases eg.instant noodles
What happens when one of the determinants of demand changes
the entire demand curve shifts to the right (if there’s an increase in demand) or to the left (a decrease in demand)
A change in quantity demanded (movement along the curve) can be caused only by one thing, which is what?
A change in the price of that product
