Unit 2

Question 1

What is Demand?

Answer 1

Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices

Question 2

What is the Law of Demand?

Answer 2

There is an INVERSE relationship between
price and quantity demanded

As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls

Question 3

5 shifters in demand?

Answer 3

5 Shifters (Determinates) of Demand:
1.Tastes and Preferences
2.Number of Consumers
3.Price of Related Goods
4.Income
5.Future Expectations

Changes in PRICE don’t shift the curve. It
only causes movement along the curve.

Question 4

Why does the Law of Demand occur?

Answer 4

The law of demand is the result of three
separate behavior patterns that overlap:
1.The Substitution effect
2.The Income effect
3.The Law of Diminishing Marginal Utility

Question 5

The Substitution Effect

Answer 5

If the price goes up for a product, consumer buy
less of that product and more of another
substitute product (and vice versa)

Question 6

Income Effect

Answer 6

If the price goes down for a product, the
purchasing power increases for consumers -
allowing them to purchase more

Question 7

Substitutes

Answer 7

Substitutes are goods used in place of one
another

If the price of one increases, the demand for the
other will increase (or vice versa)

Question 8

Complements

Answer 8

Complements are two goods that are bought
and used together.

If the price of one increase, the demand for the
other will fall. (or vice versa)

Question 9

What is supply?

Answer 9

What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices

Question 9

What is the Law of Supply?

Answer 9

There is a DIRECT (or positive) relationship between
price and quantity supplied

As price increases, the quantity producers make
increases
As price falls, the quantity producers make falls

Question 10

6 Shifters (Determinants) of Supply

Answer 10

1. Prices/Availability of inputs (resources)
2. Number of Sellers
3. Technology
4. Government Action: Taxes & Subsidies
5. Opportunity Cost of Alternative
   Production
6. Expectations of Future Profit

Changes in PRICE don’t shift the curve. It only
causes movement along the curve.

Question 10

Four single shifts

Answer 10

1. Demand: rises, then Price: rises, and Quantity: Increases
2. Demand: decreases, then Price: decreases, and Quantity: decreases
3. Supply:rises, then Price: falls, and Quantity: rises
4. Supply: decreases, then Price: rises, and Quantity: decreases

Question 11

Consumer Surplus

Answer 11

Consumer Surplus is the difference
between what you are willing to pay
and what you actually pay.

CS = Buyer’s Maximum – Price

Question 12

Producer’s Surplus

Answer 12

Producer’s Surplus is the difference
between the price the seller received
and how much they were willing to sell
it for.

PS = Price – Seller’s Minimum

Question 13

Elasticity

Answer 13

Elasticity shows how sensitive quantity is
to a change in price

Question 14

Elasticity of Demand-

Answer 14

Elasticity of Demand-
* Measurement of CONSUMERS
responsiveness to a change in price.

Question 15

Inelastic Demand

Answer 15

INelastic = Quantity is
INsensitive to a change in price

Question 16

General Characteristics
of INelastic Goods (5)

Answer 16

General Characteristics
of INelastic Goods:

!. Few Substitutes
2. Necessities
3. Small portion of
income
4.Required now, rather
than later
5. Elasticity coefficient
less than 1

Question 17

General Characteristics
of Elastic Goods: (5)

Answer 17

General Characteristics
of Elastic Goods:
1. Many Substitutes
2. Luxuries
3. Large portion of
income
4. Plenty of time to
decide
5. Elasticity coefficient
greater than 1

Question 18

Total Expenditures Test

Answer 18

Price X Quantity = Total Expenditures

Uses elasticity to show how changes in price will
affect total revenue

Question 19

Elastic demand vs TR

Answer 19

Elastic Demand-
* Price increase causes TR to decrease
* Price decrease causes TR to increase

Question 20

Inelastic Demand vs TR

Answer 20

Inelastic Demand
* Price increase causes TR to increase
* Price decrease causes TR to decrease

Question 21

Unit Elastic vs TR

Answer 21

Price changes and TR remains unchanged

Question 22

Inelastic coefiecient

Answer 22

Elasticity of demand LESS THAN 1

Question 23

Elastic coefiecient

Answer 23

Elasticity of demand MORE THAN 1

Question 24

Unitary coefficient

Answer 24

Elasticity of demand EQUALS 1

Question 25

Perfectly elastic coefficient

Answer 25

Elasticity of demand EQUALS 0

Question 26

Perfectly Inelastic coefficient

Answer 26

Elasticity of demand EQUALS INFINITY

Question 27

Cross-Price elasticity

Answer 27

Cross-Price elasticity shows how sensitive a product is
to a change in price of another good
* It shows if two goods are substitutes or complements

coefficient is negative= complements
coefficient is positive= substitutes

Question 28

Normal Goods

Answer 28

Normal Goods
* As income increases, demand increases
* As income falls, demand falls

Question 29

Inferior Goods

Answer 29

Inferior Goods
* As income increases, demand falls
* As income falls, demand increases

Question 30

Excise Tax

Answer 30

Excise Tax = A per unit tax on producers