Chapter 3 Questions & Chapter Review Flashcards
Explain how prices act to transmit information.
Rising prices inform producers that consumers are demanding more products and falling prices inform producers that demand is lessening for product. Prices tell producers what and how much to produce.
According to Jevons, when an individual makes a decision at the margin, how does he determine the amount to obtain?
The individual chooses to obtain the amount at which the marginal benefit just offsets the marginal cost.
Why is it that when the price of an original good rises we tend
to purchase more substitute goods and fewer complementary goods?
When the price of an original good rises the prices of complimentary good will likely also rise. Consumers will then purchase more of the substitute good which likely remained at a lower cost.
List five goods that you consider normal goods and five that you consider inferior goods.
Normal good: higher end makeup, clothes, shoes, cars, designer bags
Inferior good: cheap jewelry, travel on city buses, used cars, secondhand clothing, and powdered milk
Give an example to explain the principle of diminishing marginal utility.
Examples will vary but could include simple illustrations such as the number of cookies eaten at home after school or glasses of water consumed when thirsty
Who identified the principle of diminishing marginal utility?
William Stanley Jevons
What does that principle state?
People tend to receive less and less addition satisfaction from any good or service as they obtain more and more of it during a specific period of time
What are the three functions of prices?
Transmit information
Provide incentives
Redistribute income
What is the economic definition of the word demand?
The act of buying goods or services
State the law of demand.
Everything else being held constant the lower the price charged for a good or service the greater the quantity people will demand and vice versa
What is the name of the graph that illustrates the demand for
certain products?
Demand curve
What four conditions may change the demand for a product?
Change in people’s incomes
Change in the price of related goods
A change in people’s taste and preferences
Change in people’s expectations
