Markets/Price determination

Question 1

demand

Answer 1

The desire and willingness to purchase a product at a given price

Question 2

effective demand

Answer 2

willingness and ability to purchase a product at a given price

Question 3

law of diminishing marginal utility

Answer 3

the utility gained from extra units of good is lower when you have many units already

Question 4

law of demand

Answer 4

inverse relationship with quantity demanded and price

Question 5

what are exceptions to the law of demand

Answer 5

when price increases demand increases

Question 6

veblen goods

Answer 6

consumers may view higher prices as a sign of better product quality, this is usually seen in luxury goods

• high end watches and cars, gives them a feel of wealth

Question 7

Speculative goods

Answer 7

when the price of a good increases, investors may believe that the price will continue to increase and so they invest in it.

Question 8

what factors cause a demand to shift

Answer 8

• changes in the price of a substitute
• changes in the price of a complementary good
• changes in real income
• change in fashion - taste and preferences
• marketing

Question 9

Substitute good

Answer 9

if the price of good X increases the demand for good Y will increase

Question 10

complementary good

Answer 10

if the price of good X increases the demand for good Y decreases

Question 11

real income

Answer 11

The value of incomes received after allowing for inflation.

-the moneys purchasing power

Question 12

changes in real income - normal good

Answer 12

demand for normal goods increases when income increases. most goods are normal goods

Question 13

changes in real income - inferior good

Answer 13

demand for inferior goods decreases when real incomes increase

inferior goods are sub standard goods

Question 14

Example of an inferior good

Answer 14

groceries

Question 15

changes in fashion and marketing

Answer 15

inward shift (left) is caused by something going out of fashion or receiving less marketing

Question 16

An elasticity measures…

Answer 16

How much a variable changes when another variable changes

Question 17

Price elasticity of demand measures… (PED)

Answer 17

The responsiveness of quantity demand to changes in price

Question 18

PED formula

Answer 18

% change in price

Question 19

What does the elasticity formula measure

Answer 19

An elasticity measures how much the top variable changes due to a change in the bottom variable

Question 20

perfectly inelastic PED value

Answer 20

0

Question 21

inelastic PED value

Answer 21

0 > PED > -1

Question 22

unit elastic PED value

Answer 22

-1

Question 23

elastic PED value

Answer 23

-1 > PED > -infinity

Question 24

perfectly elastic PED value

Answer 24

• infinity

Question 25

elastic demand definition

Answer 25

When the percentage change in demand is greater than the percentage change in price.

Question 26

inelastic demand definition

Answer 26

When the percentage change in demand is less than the percentage change in price.

Question 27

Unitary demand defintion

Answer 27

When the percentage change in quantity demanded is equal to the percentage change in price.

Question 28

what does Income elasticity of demand measure

Answer 28

measures the responsiveness of a variable to changes in another variable

Question 29

Income elasticity of demand definition

Answer 29

Measures the responsiveness of demand to changes in income

Question 30

What is Y

Answer 30

income

Question 31

YED

Answer 31

proportionate change in Qd ----------------------------------------- proportionate change in Y

Question 32

real income changes

Answer 32

the amount of purchasing power consumers have will affect demand for all products

Question 33

how is demand effected when real income increases

Answer 33

demand for normal goods goes up demand for inferior goods goes down

Question 34

relationship with demand for normal goods and real income changes

Answer 34

direct relationship increase income causes an outward shift in demand

Question 35

when is YED > then 0

Answer 35

real income increases, Qd is positive and Y is positive positive number YED = ----------------------------- positive number YED > 0 when incomes increases normal good

Question 36

relationship with demand for inferior goods and real income changes

Answer 36

inverse relationship increase in income causes an inward shift

Question 37

When is YED < 0

Answer 37

real incomes decrease, QD are negative and Y is positive YED = negative number / positive number YED < 0 when incomes decrease

Question 38

how does demand change for necessary goods

Answer 38

demand rises slowly as incomes rises 0

Question 39

How does demand change for luxury goods

Answer 39

Demand rises quickly as income increases YED > 1

Question 40

Normal goods examples

Answer 40

- necessary goods - luxury goods

Question 41

XED stand for

Answer 41

cross elasticity of demand

Question 42

What does XED measure

Answer 42

measure responsiveness of demand to changes in the price of another good

Question 43

XED equation

Answer 43

proportionate change in QdA ------------------------------------------ proportionate change in PB A = good A B = good B

Question 44

Substitute goods

Answer 44

if the price of good x increases, demand for good Y increases

Question 45

How do we use XED to measure a substituted good

Answer 45

if price of good B increases, QDA is positive and PB is positive XED = positive Qda / positive Pb = >0 > 0 = subsitiute good

Question 46

Complementary goods

Answer 46

if the price of good x increases, the demand for good Y decreases

Question 47

How can we use XED to measure a complemantary good

Answer 47

if price of good B increases, QDA is negative and PB is positive XED = negative QDA / positive PB = < 0 < 0 = complemtary good