Chapter 5: Demand and Consumer Behaviour

Question 1

On what fundamental premise does economics rely on?

Answer 1

Economics relies on the fundamental premise that people tend to choose those goods and services they value most highly.

Question 2

What does “Marginal” mean in economics?

Answer 2

Marginal means an additional unit in economics

Question 3

Marginal utility:

Answer 3

Marginal utility denotes the additional utility arising from the consumption of an additional unit of a commodity.

Question 4

What does the law of diminishing marginal utility state?

Answer 4

The law of diminishing marginal utility states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish.

Question 5

Equimarginal principle:

Answer 5

The law of diminishing marginal utility states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish.

Question 6

Substitution effect:

Answer 6

When the price of a good rises, consumers will start to look to alternatives in order satisfy their needs more inexpensily.

Question 7

Income effect:

Answer 7

The change in the quantity demanded that arises because a price change lowers consumer real incomes.

Question 8

High income elasticities:

Answer 8

Demand for goods rises rapidly as income increases.

Question 9

Low income elasticities:

Answer 9

Weak response of demand as income rises.

Question 10

Substitute goods:

Answer 10

Goods are substitutes if an increase in the price of one increases the demand for the other.

Question 11

Complementary goods:

Answer 11

Goods are complements if an increase in the price of one decreases the demand for the other

Question 12

Independent goods:

Answer 12

Goods are independent if a price change for one has no effect on the demand for the other.

Question 13

Demerit goods:

Answer 13

In economics, a demerit good is “a good or service whose consumption is considered unhealthy, degrading, or otherwise socially undesirable due to the perceived negative effects on the consumers themselves”

ex: passive smoking and increased healthcare costs for all

Question 14

Social cost:

Answer 14

private cost + external cost

Question 15

What is a conspicuous characteristic of demerit goods that cause addiction?

Answer 15

Demand for highly addictive goods is likely to be quite price-inelastic.

Question 16

The paradox value:

Answer 16

The more there is of a commodity, the less is the relative desirability of its last little unit.

Question 17

Consumer surplus:

Answer 17

Consumer´s gain from an exchange

Question 18

Indifference curve:

Answer 18

An indifference curve shows combinations of goods and services between which a consumer is indifferent.

Question 19

Law of Substitution:

Answer 19

The substitution effect refers to the change in demand for a good as a result of a change in the relative price of the good compared to that of other substitute goods. For example, when the price of a good rises, it becomes more expensive relative to other goods in the market.

Question 20

Consumer´s equilibrium:

Answer 20

Consumer’s Equilibrium means a state of maximum satisfaction. A situation where a consumer spends his given income purchasing one or more commodities so that he gets maximum satisfaction and has no urge to change this level of consumption, given the prices of commodities, is known as the consumer’s equilibrium.