Chapter 4: Individual and Market Demand

Question 1

What are the two types of changes to consider when budget constraints are analysed

Answer 1

1. Price changes
2. Income changes

Question 2

What is the price consumption curve

Answer 2

Curve tracing the utility maximising combinations of two goods as the price of one changes

Question 3

What is an individual demand curve

Answer 3

Curve relating to the quantity of a good that a single consumer will buy to its price

Question 4

What are the two important proprieties of an individual demand curve

Answer 4

• The level of utility that can be attained changes as we remove along the curve
• At every point on the demand curve the consumer is maximising utility by satisfying the condition that the marginal rate of substitution of the goods equals the ratio of the prices of the goods

Question 5

What is the income consumption curve

Answer 5

Curve tracing the utility maximising combinations of two goods as a consumers income changes

Question 6

What is a normal good

Answer 6

Goods to which income increases corresponds with an increase in demand (positive income elasticity)

Question 7

What is an inferior good

Answer 7

Good to which income increases corresponds with a decrease in demand (negative income elasticity)

Question 8

What is an engel curve

Answer 8

Income consumption curves can be used to construct engel curves. An engel curve relates the quantity of a good consumed to the corresponding income levels

Question 9

What are substitute goods

Answer 9

If an increase in the price of one leads to an increase in the quantity demanded of the other (downward sloping curve)

Question 10

What are complementary goods

Answer 10

If an increase in the price of one leads to a decrease in the quantity demanded of the other (upward sloping curve)

Question 11

What are independent goods

Answer 11

If a change in the price of one good has no effect on the quantity demanded of the other

Question 12

What are the effects that take place considering different types of goods when there is a price change

Answer 12

1. Consumers will tend to buy more of the good that has become cheaper and less of those goods that are now relatively more expensive. This response to a change in the relative price of goods is called the substitution effect.
2. Because one of the goods is now cheaper consumers will enjoy an increase in real purchasing power. The change in demand resulting from this change in real purchasing power is called the income effect

Question 13

What is the difference between substitution effect and the income effect

Answer 13

The substitution effect is a change in consumption of a good associated with a change in its price, with the level of utility held constant

The income effect is a change in consumption of good resulting from an increase in purchasing power, with relative prices held constant

Question 14

What is a Giffen good

Answer 14

Good whose demand slopes upward due to a larger income effect as opposed to a substitution effect

Question 15

What is market demand

Answer 15

Market demand shows how much the consumers in general are willing to buy as the price changes

Question 16

What is the market demand curve

Answer 16

Curve relating to the quantity of a good that all consumers in a market will buy to its price

Question 17

What is isoelastic demand

Answer 17

When demand illustrates a constant price elasticity regarding how much is consumed

Question 18

What is speculative demand

Answer 18

Demand driven not by the direct benefits one obtains from owning or consuming a good but instead by an expectation that the price of the goods will increase

Question 19

What is consumer surplus

Answer 19

Difference between what a consumer is willing to pay for a good and the amount actually paid

Question 20

Explain network externality

Answer 20

When each individuals demand depends on the purchases of other individuals. Network externalities can be positive or negative

Question 21

Differentiate negative and positive externalities

Answer 21

A positive externality exists if the quantity of good demanded by a typical consumer increases (in response to the growth in purchases of other consumers), if the quantity demanded decreases there is a negative externality

Question 22

What is the bandwagon effect (elastic market demand)

Answer 22

A positive externality in which a consumer wishes to possess a good in part because others do

Question 23

What is the snob effect (less elastic market demand)

Answer 23

A negative network externality in which a consumer wishes to own an exclusive or unique good. (the value that one gets us based on the status, prestige and exclusivity)

Question 24

The engel curve shows combinations of ___

Answer 24

Income and the quantity consumed of one good

Question 25

An individual demand curve can be derived from

Answer 25

The price consumption curve