Economics Chapter 4 Demand Flashcards

Questions and Answers

What determines the price in the market system?

The interactions between the buyers and sellers

What is demand?

The desire to own something and the ability to pay for it

What is the Law of Demand?

Consumers buy more of a good when its price decreases and less when its price increases

What is the substitution effect?

When consumers react to an increase in a good's price by consuming less of that good, and more of other goods Signup and view all the answers

What is the income effect?

The change in consumption resulting from a change in real income Signup and view all the answers

What is a demand schedule?

A table that lists the quantity of a good that a person will purchase at each price in a market Signup and view all the answers

How is a market demand schedule different from a demand schedule?

A market demand schedule shows the quantities demanded at each price by all consumers while a demand schedule shows just one person. Signup and view all the answers

What is a demand curve?

A graph of the relationship between the price of a good and the quantity demanded. Signup and view all the answers

What numbers are labeled on the vertical (y) axis of a demand curve?

Prices Signup and view all the answers

What numbers are labeled on the horizontal (x) axis of a demand curve?

Quantity Signup and view all the answers

In what direction will a demand curve always slope?

From the top of the y-axis to the right of the x-axis diagonally Signup and view all the answers

What does ceteris paribus translate to?

"All other things held constant" Signup and view all the answers

What does ceteris paribus mean in economics?

A change in price Signup and view all the answers

What type of movement happens on a demand curve when only price changes?

Change in quantity demanded Signup and view all the answers

What is the type of movement called when only price changes on a demand curve?

Movement along the curve Signup and view all the answers

What does the curve do when ceteris paribus is dropped?

Doesn't move along the demand curve; entire demand curve shifts Signup and view all the answers

How do economists describe the movement when ceteris paribus is dropped?

Shift in the demand curve Signup and view all the answers

Which way does the demand curve shift if the demand decreases?

Shift to the left Signup and view all the answers

Which way does the demand curve shift if the demand increases?

Shift to the right Signup and view all the answers

What are normal goods?

Goods that consumers demand more of when their income increases Signup and view all the answers

What would happen to your demand for normal goods if your pay decreased?

Less demand Signup and view all the answers

What are inferior goods?

Goods that consumers demand less of when their income increases Signup and view all the answers

What would happen to your demand for inferior goods if your pay increased?

Buy in smaller quantities or not at all Signup and view all the answers

What role do expectations for the future play in demand?

Whether or not we expect a good's price to increase or decrease in the future affects our demand for that good today. Signup and view all the answers

If you hear that a car you want is going on sale next week, how will that affect your demand today?

Demand today is less Signup and view all the answers

If you hear that the iPad you want will be more expensive next week, how will that affect your demand today?

Demand today is higher Signup and view all the answers

How does a change in population affect demand?

Will increase demand for housing, food, and other goods and services. Signup and view all the answers

What types of things had an increase in demand after World War 2 soldiers started families?

Baby clothes, baby food, books on baby care, etc. Signup and view all the answers

How does advertising affect consumer demand?

It plays an important role in many trends and influences demand. Signup and view all the answers

What are complements?

Two goods that are bought and used together, and can affect each other's demand. Signup and view all the answers

If soup and crackers are complements, how will the demand for soup change if crackers go on sale?

Demand for soup increases Signup and view all the answers

What are substitutes?

Goods used in place of one another Signup and view all the answers

If Nikes and Adidas are substitutes, how will the demand for Nike change if Adidas becomes more expensive?

Demand for Nike will increase Signup and view all the answers

What is elasticity of demand?

A measurement of how consumers react to a change in price Signup and view all the answers

What types of goods are inelastic?

Goods that you will keep buying despite a price increase; usually a necessity Signup and view all the answers

What types of goods are elastic?

Goods that you buy less of after a small price increase; usually a luxury or a substitute Signup and view all the answers

Why would a demand for a good be inelastic at low price levels?

The low prices mean a steady quantity demanded; it's still affordable. Signup and view all the answers

Why would a demand for a good be elastic at high price levels?

Higher prices means decreased quantity demanded. Signup and view all the answers

If elasticity of demand is less than 1, what type of demand do you have?

Inelastic demand. Signup and view all the answers

If elasticity of demand is greater than 1, what type of demand do you have?

Elastic demand Signup and view all the answers

If elasticity of demand is equal to 1, what type of demand do you have?

Unitary demand, or unit demand. Signup and view all the answers

What type of elasticity will a good have if there are few substitutes for that good?

Inelastic elasticity. Signup and view all the answers

What type of elasticity will a good have if there are many substitutes for that good?

Elastic elasticity. Signup and view all the answers

Life saving goods such as medicine have what type of elasticity?

Inelastic elasticity. Signup and view all the answers

What type of elasticity will you have for a good if that good already takes up a very large amount of your income?

Elastic Signup and view all the answers

Why will you have the type of elasticity you have for a good if that good already takes up a very large amount of your income?

You can buy more products with the amount of money used to buy a single good that is very expensive. Signup and view all the answers

What are necessities?

Goods that people will always buy, even when the price increases; usually inelastic Signup and view all the answers

Necessities have what type of elasticity?

Inelastic elasticity Signup and view all the answers

What types of goods are luxuries?

Things that aren't required to survive, like steak; elastic Signup and view all the answers

Do luxury goods have elastic or inelastic demand?

Elastic Signup and view all the answers

What is total revenue?

The amount a firm receives for the sale of its output before production costs are paid Signup and view all the answers

According to the Law of Demand, what happens to demand when prices rise?

Demand goes down when prices go up. Signup and view all the answers

For elastic goods, what will happen to total revenue if prices increase?

Prices go up, Revenue goes down Signup and view all the answers

For elastic goods, what will happen to total revenue if prices decrease?

Prices go down, Revenue goes up Signup and view all the answers

For inelastic goods, what will happen to total revenue if prices increase?

Prices go up, Revenue goes up Signup and view all the answers

For inelastic goods, what will happen to total revenue if prices decrease? Why?

Prices go down, Revenue goes down (same customers, not any new ones) Signup and view all the answers

Why does a firm need to know if their product has elastic or inelastic demand?

So they can maximize their profit Signup and view all the answers

Study Notes

Market Dynamics

Price in a market system is determined by interactions between buyers and sellers.
Demand combines the desire to own a product with the ability to pay for it.

Demand Fundamentals

The Law of Demand states prices inversely relate to quantity demanded; lower prices lead to higher demand.
Substitution Effect occurs when consumers buy less of an expensive good and more of a cheaper alternative.
Income Effect describes changes in consumption due to changes in real income levels.

Demand Measurement Tools

A Demand Schedule shows the quantities purchased at various prices by an individual.
A Market Demand Schedule aggregates the demand of all consumers at each price point.
The Demand Curve visually represents price and quantity demanded relationship, always sloping downward.

Analytical Terms and Movements

"Ceteris Paribus" means "all other things held constant," often used in economic models to isolate factors.
A price change results in movement along the demand curve, indicating a change in quantity demanded.
A shift in the demand curve occurs when ceteris paribus assumptions are lifted, indicating a change in demand conditions.

Demand Curve Shifts

The demand curve shifts leftward when demand decreases and rightward when demand increases.
Normal Goods see increased demand with rising income, while Inferior Goods see decreased demand with rising income.

Expectations and Demand

Future price expectations can alter current demand; anticipated price decreases lower present demand, while anticipated increases raise it.

Population and Advertising Impacts

Increasing population drives demand for essential goods like housing and food.
Advertising significantly shapes consumer trends and influences demand.

Complementary and Substitute Goods

Complements are goods consumed together; a sale of one typically increases demand for the other.
Substitutes replace one another; if the price of one rises, demand for its alternatives generally increases.

Elasticity of Demand

Elasticity measures consumer responsiveness to price changes, categorized into inelastic and elastic.
Inelastic goods remain essential regardless of price changes, while elastic goods see decreased demand with even small price increases.
Total Revenue shifts with price changes, with elastic demand resulting in decreased total revenue when prices rise and increased revenue when they fall.
Inelastic goods yield increased total revenue when prices rise and decreased revenue when they fall, as they attract the same customers rather than new ones.

Necessities vs. Luxuries

Necessities are typically inelastic; consumers continue purchasing despite price increases.
Luxuries are elastic; demand drops significantly when prices increase.

Total Revenue Insight

Total Revenue signifies earnings from sales before accounting for production costs, crucial for firms to optimize profit strategies based on demand elasticity.

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Description

Test your knowledge of demand concepts in economics with these flashcards from Chapter 4. Covering key terms like the law of demand and the substitution effect, this quiz will help reinforce your understanding of how market prices are determined through the interaction of buyers and sellers.