Individual and Market Demand

Question 1

Substitution Effect

Answer 1

Consumers buy more when an item is cheaper and less when the good increases in expense

Question 2

Income Effect

Answer 2

As a version of a good is cheaper, consumers enjoy the increase in purchasing power

Question 3

Total Effect

Answer 3

Total Effect = Income effect + Substitution effect
IE: change in consumption from increase in purchasing power but price is held constant
SE: change in consumption as price changes but utility is held constant

Question 4

Giffen Good

Answer 4

Good with an upwards sloping demand curve: demand increases as price increases

Question 5

Income Consumption Curve (ICC)

Answer 5

Shows sets of optimal bundles for good X as individual income increases
(graph)

Question 6

Engel Curve

Answer 6

Shows relationship between quantity of good demanded and income
- Normal good: upwards sloping
- Inferior good: downwards sloping
On occasion curve can be backwards bending if:
- Normal good decreases as income increases
- Inferior good increases as income levels decrease
(graph)

Question 7

Market Demand

Answer 7

The sum off all individual demand curves
- Total MD, we need to add quantity not the price: solve inverse demand then add

Question 8

Total Revenue

Answer 8

TR = P x Q
- Price increase will increase TR if -1 < Ed < 0
- Price increase will reduce TR if Ed < -1

Question 9

Income Elasticity Demand

Answer 9

% change in Q demand for a good following a 1% change in income

Question 10

Cross-price Elasticity of Demand

Answer 10

% change in Qd of a good in response to a 1% change in the price of anther good.
Exz = (change in Qx/ change in Pz) x (Pz/ Qx)
If the goods are:
- Substitutes: Exz > 0
- Complements: Exz < 0
- Independent good if change in price of a good has no effect of Q demanded of the other