Microeconomics (Khan)

Question 1

What is the Law of Demand?

Answer 1

The law of demand states that, ceteris paribus, there is an inverse relationship between the price of a good and its quantity demanded.

Question 2

What is Demand? Explain in intuitive, mathematical, and graphical terms.

Answer 2

Demand is the relationship between every price and its respective quantity demanded in a specific set of circumstances (ceteris paribus).
Mathematically it is a specific function relating price and quantity demanded.
Graphically it is the entire curve (or surface) relating the variables in question.

Question 3

What is a Price for a buyer?

Answer 3

What a buyer pays for a unit of a specific good or service.

Question 4

What is a Quantity Demanded? Explain in intuitive, mathematical, and graphical terms.

Answer 4

It is the quantity of a good effectively demanded at a specific price, ceteris paribus.
In graphical terms it is one of the points in the demand function given a specific price.
In mathematical terms it is the result of evaluating a specific price in the demand function.

Question 5

In an economist’s perspective, what is the difference between a Want and a Need?

Answer 5

A consumer may be able to differentiate between a want and a need, but for economists it is the same thing.

Question 6

On which two fundamental concepts is Demand based?

Answer 6

Demand is based on preferences and ability to pay. If you cannot pay, you have no effective demand.

Question 7

In terms of Individual Demand, what is Market Demand?

Answer 7

Market demand is just the sum of all the individual demands of buyers in a market.

Question 8

There are three reasons why the Law of Demand applies, what are they? What are their individual contributions to the law of demand?

Answer 8

The substitution effect, the income effect, and the diminishing marginal utility effect.

Question 9

Specifically, what is the Substitution Effect of Demand?

Answer 9

The substitution effect shows how changes in the prices of goods and services can encourage buyers to seek alternative products.

Question 10

What is the Income Effect of Demand?

Answer 10

The income effect is the change in the consumption of goods based on income. This means consumers will generally spend more if they experience an increase in income, and they may spend less if their income drops.

Question 11

What is the Decreasing Marginal Utility of Demand?

Answer 11

Decreasing or diminishing marginal utility means that the purchase of every additional unit of a product will yield less utility than the previous one.

Question 12

Explain the Decreasing Marginal Utility of Demand for an entire market.

Answer 12

Buyers will be willing to pay more for their first units, but their additional utility will decrease with every unit they buy and so will their willingness to pay the same price, so the seller will be forced to decrease the price in order to keep selling. (Check this answer)

Question 13

What are the five Determinants of Demand? What is their acronym? What does each letter stand for?

Answer 13

TONIE. T for tastes/preferences. O for other/related goods. N for number of buyers (population/composition changes). I for income. E for expectations.

Question 14

Explain how Tastes and Preferences affect Demand.

Answer 14

When tastes change, buyers will exit markets for the goods they don’t prefer anymore and enter markets for the goods they now prefer, so at every price there will be fewer and additional buyers, respectively.

Question 15

Explain how Other Goods (related goods) affect Demand and what they are.

Answer 15

Related goods are either substitute or complementary goods.

If A and B are substitutes, there is a positive relationship between the price of A and the Demand for B, because people will substitute good A for B and the Demand for B will increase.

If A and B are complements, meaning they are used together, there is a negative relationship between the price of A and the Demand for B, because people will buy less of both when the price of either increases.

Question 16

Explain how changes in the Number of Buyers (population composition changes) affect Demand.

Answer 16

Population size and/or composition shifts demand because new people will enter the market at every price if the population change favors the good in question, or exit the market at every price if the change in population does not favor the good.

Question 17

Explain how Expectations of future conditions affect Demand.

Answer 17

Expectations shift demand curves because depending on what they are, people will enter or exit the market at every price.

Question 18

What is a Normal Good?

Answer 18

A normal good is anything for which demand will increase if income increases. It is the opposite of an inferior good.

Question 19

What is an Inferior Good?

Answer 19

An inferior good is anything for which demand will decrease if income increases. It is the opposite of a normal good.

Question 20

Is the Price of a product a determinant of its Demand?

Answer 20

No. The price of a product does not affect its demand, it affects its quantity demanded. Demand is the relationship between every price and every quantity in a specific scenario (ceteris paribus).

Question 21

Of what is Price a determinant?

Answer 21

Price is a determinant of quantity demanded.

Question 22

What is the Substitution Effect essentially about?

Answer 22

The substitution effect is about changes in the relative prices of a good. When the price of a good decreases, it is now relatively cheaper than it used to be, and consumers will substitute toward purchasing more of that good.

Question 23

What does the Law of Supply state?

Answer 23

It states that, ceteris paribus, there is a positive relationship between the price of a good and its quantity supplied.

Question 24

What is Supply?

Answer 24

When economists talk about supply, they mean the amount of some good or service a producer is willing to supply at each price in a specific context. In other words, the relationship between price and quantity supplied, holding everything else equal.

Question 25

What is Quantity Supplied?

Answer 25

When economists refer to quantity supplied, they mean only a certain point on the supply curve, or one quantity on the supply schedule. In short, supply refers to the curve, and quantity supplied refers to a specific point on the curve.

Question 26

What is a Price for a seller?

Answer 26

it is what the producer receives for selling one unit of a good or service.

Question 27

What effect does a Price Cap have on Supply and on Quantity Supplied?

Answer 27

A price cap is an external factor for the market, but it acts as a change in price, so it will not shift supply, it will only reduce the quantity supplied.

Question 28

Which are seven factors that affect Supply? What is their acronym?

Answer 28

GENTREC

Government policies
Environmental factors
Number of sellers
Technological advancement (and tech adoption)
Related goods (price of substitutes for production)
Expectations
Costs (changes in the price of inputs)

There are probably more categories.

Question 29

For a farmer that grows two commodities in their land, what is an example of a substitute for production?

Answer 29

A farmer produces two commodities in their land. If one of their prices goes up, he will allocate land in favor of that commodity, substituting the other one.

Question 30

What is the Ceteris Paribus assumption?

Answer 30

A demand/supply curve is a relationship between only two variables. The assumption behind it (ceteris paribus) is that no relevant economic factors, other than the product’s price, are changing.

Question 31

What can happen if Ceteris Paribus is not assumed?

Answer 31

If all else is not equal, then the laws of supply and demand will not necessarily hold.

Question 32

Generally, what are the substitution and income effects?

Answer 32

The substitution effect and the income effect are two economic concepts that identify how changes in the market affect consumers’ buying habits for certain products and services.