Individual And Market Demand

Question 1

What is the income holding prices constant

Answer 1

The point at which the budget constraint curve crosses the y axis

Question 2

What does an Engel curve show

Answer 2

The relationship between an increased demand and income

Question 3

How is demand for normal goods affected by income

Answer 3

It increases one for one or less

Question 4

How is demand for inferior goods affected by an increase in income

Answer 4

Demand decreases

Question 5

What is the income elasticity of normal goods

Answer 5

0-1

Question 6

What is the income elasticity of luxury goods

Answer 6

More than one

Question 7

What are those goods whose share of expenditure rises slower than income called

Answer 7

Necessity goods

Question 8

How is the demand curve constructed for an individual

Answer 8

By observing how the utility maximization function is affected by changes in price

Question 9

How can the demand curve be changed for an individual

Answer 9

If income changes and if preferences change

Question 10

How can the total effect of a change on a quantity demanded be broken down

Answer 10

The substitution effect and the income effect

Question 11

What is the substitution effect in the supply demand model

Answer 11

How preferences shift away from options that are relatively more expensive to its substitutes

Question 12

What is the income effect in the supply demand model

Answer 12

How demand changes when more options are available due to people buying less inferior goods and more luxury

Question 13

What are giffen goods

Answer 13

A good that gains increased demand when prices rise or that gains less demand when prices fall

Question 14

When are goods substitutes and complementd

Answer 14

If demand falls when prices for others rise they are complements but the reverse is true for substitutes

Question 15

How do you calculate market demand

Answer 15

By aggregating all individual demands in the market

Question 16

What variables are held constant too see the income effect

Answer 16

Relative prices

Question 17

What is the difference between an income expansion path and an Engel curve

Answer 17

The income expansion path shows how the optimal ratio between two goods change with income while the engel curve shows how the quantity consumed changes with income

Question 18

When price of a good increases will the substitution effect be negative

Answer 18

Yes and the opposite if it decreases as demand goes to the relatively cheeper substitute

Question 19

Will the willingness to buy an inferior good decrease when prices rise due to the income effect

Answer 19

No as people get poorer they buy more inferior but this is offset by substitution

Question 20

Explain how you separate a income effect and substitution effect

Answer 20

First you calculate substitution effect by the following process. First you draw the new budget line by drawing it from same price y to new price x. Than you see how demand changes if relative income were constant by moving the new curve to tangent the old indifference curve. The interval between the tangent at new curve at the old income and the old tangent is the substitution effect. The income effect is the space between the substitution point and the result of the new indifference curve tangenting the real new budget line.