Lesson 18 pg. 55 - 58

Question 1

Describe and define law of demand

Answer 1

Law of Demand
>one of most important principles of economics
>explains inverse relationship between price of good and amount that people choose to buy
>states: “Other things remaining equal, as the price of a good increases, the quantity demanded decreases in a free market economy”

Question 2

How does one know if demand for an item is high or low?

Answer 2

In order to know if demand for an item is high or low, we must be able to show the amount bought over a length of time.

Question 3

Describe the income effect

Answer 3

> says that when price of a good falls, consumers tend to buy more of that good or of other items because they can do so without giving up anything
in effect, lower prices give consumer expanded buying power, or a seemingly larger income, and higher prices eliminate the consumers buying power

Question 4

Describe the substitution effect

Answer 4

> indicates that people tend to substitute less expensive goods for ones whose prices have risen
explains why consumers’ expenses may not increase much when prices rise
in free markets, it is often possible for a person to find some good to substitute for an item that has become too expensive for him to purchase
for everyone there is a point at which price becomes the decisive consideration, the point at which a consumer alters his economic behavior

Question 5

Define demand schedule

Answer 5

demand schedule - list of numbers that compares price with quantity demanded

Question 6

Define demand curve

Answer 6

demand curve - graphic representation of quantity of goods purchased at different prices
>always slopes downward to the right

Question 7

Describe the meaning of Latin phrase “ceteris paribus”

Answer 7

assumes that all other factors remain constant during entire time and that only factor influencing how many bicycles people buy is the price

Question 8

List the five key factors that can shift the demand curve

Answer 8

1. Tastes and preferences
2. Income
3. Population
4. Prices of Relate Goods
5. Consumer Expectations

Question 9

Define normal good

Answer 9

normal good - a good whose demand is directly related to consumers’ incomes

Question 10

Define inferior goods

Answer 10

inferior goods - demand for these item decreases as consumers’ incomes increase, and vice versa
>examples: beans, used cars, and bus trips

Question 11

Define substitutes

Answer 11

substitutes - good capable of being used in place of another

Question 12

Define complements

Answer 12

complements - good often used in conjuction with another

Question 13

Describe a change in demand

Answer 13

> result of changes in any of the five factors of demand

>cause whole demand curve to shift either to the left or the right

Question 14

Define change in quantity demanded

Answer 14

> represented by any specific point along demand curve
influenced by price
refers to movement from one point to another along fixed demand curve
only factor that can cause a change in the quantity demanded is an increase or decrease in price