Overall

Question 1

Postulates of Human Behavior

Answer 1

1. People have preferences
2. Preferences can and do differ across individuals
3. More is preferred to less
4. People are willing to substitute one good for another
5. The more we have of good, the less we value an additional unit of that good

Question 2

Demand Schedule

Answer 2

Table showing how much of a good or service consumers will want to buy at different prices.
Shows the quantity demanded of a good at various prices.

Question 3

Demand Curve

Answer 3

A curve which graphically represents the quantity of a particular good a consumer is willing to buy at each price level.
Summarizes the relationship between quantity demanded of a good and the price of that good, holding all other factors constant.
Graphical representation of the demand schedule.

Question 4

Law of Demand

Answer 4

the quantity demanded of a good is inversely related to the price of that good, holding other factors constant.
(as price goes up, quantity demanded goes down)
(as price goes down, quantity demanded goes up)
-Demand curves are downward sloping
-Follows from Postulate 5

Question 5

Value

Answer 5

The amount of other goods an individual is willing to give up in order to obtain some good.
How much willing to pay.
Varies from person to person.

Question 6

Total Value (TV)

Answer 6

amount of other goods an individual would be willing to give up in order to consume ALL units presently consumed instead of none at all.

Question 7

Marginal Value (MV)

Answer 7

Amount of other goods an individual would be willing to give up in order to consume an incremental unit of a good.
Total Value (TV) = Sum of all Marginal Values (MV) of all units a good consumed.

Question 8

Law of Diminishing Marginal Value

Answer 8

The Marginal Value of a good decreases as more units are consumed.
Reason why individual demand curves are downward sloping (postulate 5)

Question 9

Total Expenditure (TE)

Answer 9

Total amount actually spent to purchase a given quantity of a good.
TE = price * quantity

Question 10

Consumer Surplus (CS)

Answer 10

Net benefits to the consumer.
The difference between what a consumer would be willing to pay for the units purchased (TV) and what the consumer actually pays (TE).
CS = TV - TE

Question 11

Consumption Decision Depends Upon: (2 reasons)

Answer 11

1. Price - how much the consumer must give up for each additional unit consumed.
2. Marginal value - how much is willing to give up for each additional unit consumed.

will continue to consume as long as Marginal Value for an additional unit is greater than Price.
Stop consuming the good at point where Marginal Value = Price.
- Do not consume where MV < Price

Question 12

Market Demand Curve

Answer 12

Market demand is the horizontal sum of the individual demand curves at each price

Question 13

Quantity Demanded

Answer 13

The actual amount of a good consumers are willing to buy at some specific price. (a point on the demand curve)
Change in Quantity Demanded is a movement along a demand curve in response to a change in price.

Question 14

Demand

Answer 14

Shows the amount of a good consumers are willing to buy at every price.
The entire demand curve.
Change in Demand is a shift in entire demand curve.

Question 15

Shifts of the Demand Curve

Answer 15

An “increase in demand” means a rightward shift of the demand curve: at any given price, consumers demand a larger quantity than before.

Question 16

Factors that Cause Entire Demand Curve to Shift

Answer 16

1. Change in the price of related goods
   a. Complements
   b. Substitutes
2. Changes in Income
   a. Normal goods
   b. Inferior goods
3. Change in the number of consumers
4. Changes in Information about the Uses of a Good
5. Change in Expectations about Future Prices