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Questions and Answers
What determines the price in the market system?
What determines the price in the market system?
The interactions between the buyers and sellers
What is demand?
What is demand?
The desire to own something and the ability to pay for it
What is the Law of Demand?
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?
What is the substitution effect?
What is the income effect?
What is the income effect?
What is a demand schedule?
What is a demand schedule?
How is a market demand schedule different from a demand schedule?
How is a market demand schedule different from a demand schedule?
What is a demand curve?
What is a demand curve?
What numbers are labeled on the vertical (y) axis of a demand curve?
What numbers are labeled on the vertical (y) axis of a demand curve?
What numbers are labeled on the horizontal (x) axis of a demand curve?
What numbers are labeled on the horizontal (x) axis of a demand curve?
In what direction will a demand curve always slope?
In what direction will a demand curve always slope?
What does ceteris paribus translate to?
What does ceteris paribus translate to?
What does ceteris paribus mean in economics?
What does ceteris paribus mean in economics?
What type of movement happens on a demand curve when only price changes?
What type of movement happens on a demand curve when only price changes?
What is the type of movement called when only price changes on a demand curve?
What is the type of movement called when only price changes on a demand curve?
What does the curve do when ceteris paribus is dropped?
What does the curve do when ceteris paribus is dropped?
How do economists describe the movement when ceteris paribus is dropped?
How do economists describe the movement when ceteris paribus is dropped?
Which way does the demand curve shift if the demand decreases?
Which way does the demand curve shift if the demand decreases?
Which way does the demand curve shift if the demand increases?
Which way does the demand curve shift if the demand increases?
What are normal goods?
What are normal goods?
What would happen to your demand for normal goods if your pay decreased?
What would happen to your demand for normal goods if your pay decreased?
What are inferior goods?
What are inferior goods?
What would happen to your demand for inferior goods if your pay increased?
What would happen to your demand for inferior goods if your pay increased?
What role do expectations for the future play in demand?
What role do expectations for the future play in demand?
If you hear that a car you want is going on sale next week, how will that affect your demand today?
If you hear that a car you want is going on sale next week, how will that affect your demand today?
If you hear that the iPad you want will be more expensive next week, how will that affect your demand today?
If you hear that the iPad you want will be more expensive next week, how will that affect your demand today?
How does a change in population affect demand?
How does a change in population affect demand?
What types of things had an increase in demand after World War 2 soldiers started families?
What types of things had an increase in demand after World War 2 soldiers started families?
How does advertising affect consumer demand?
How does advertising affect consumer demand?
What are complements?
What are complements?
If soup and crackers are complements, how will the demand for soup change if crackers go on sale?
If soup and crackers are complements, how will the demand for soup change if crackers go on sale?
What are substitutes?
What are substitutes?
If Nikes and Adidas are substitutes, how will the demand for Nike change if Adidas becomes more expensive?
If Nikes and Adidas are substitutes, how will the demand for Nike change if Adidas becomes more expensive?
What is elasticity of demand?
What is elasticity of demand?
What types of goods are inelastic?
What types of goods are inelastic?
What types of goods are elastic?
What types of goods are elastic?
Why would a demand for a good be inelastic at low price levels?
Why would a demand for a good be inelastic at low price levels?
Why would a demand for a good be elastic at high price levels?
Why would a demand for a good be elastic at high price levels?
If elasticity of demand is less than 1, what type of demand do you have?
If elasticity of demand is less than 1, what type of demand do you have?
If elasticity of demand is greater than 1, what type of demand do you have?
If elasticity of demand is greater than 1, what type of demand do you have?
If elasticity of demand is equal to 1, what type of demand do you have?
If elasticity of demand is equal to 1, what type of demand do you have?
What type of elasticity will a good have if there are few substitutes for that good?
What type of elasticity will a good have if there are few substitutes for that good?
What type of elasticity will a good have if there are many substitutes for that good?
What type of elasticity will a good have if there are many substitutes for that good?
Life saving goods such as medicine have what type of elasticity?
Life saving goods such as medicine have what type of elasticity?
What type of elasticity will you have for a good if that good already takes up a very large amount of your income?
What type of elasticity will you have for a good if that good already takes up a very large amount of your income?
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?
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?
What are necessities?
What are necessities?
Necessities have what type of elasticity?
Necessities have what type of elasticity?
What types of goods are luxuries?
What types of goods are luxuries?
Do luxury goods have elastic or inelastic demand?
Do luxury goods have elastic or inelastic demand?
What is total revenue?
What is total revenue?
According to the Law of Demand, what happens to demand when prices rise?
According to the Law of Demand, what happens to demand when prices rise?
For elastic goods, what will happen to total revenue if prices increase?
For elastic goods, what will happen to total revenue if prices increase?
For elastic goods, what will happen to total revenue if prices decrease?
For elastic goods, what will happen to total revenue if prices decrease?
For inelastic goods, what will happen to total revenue if prices increase?
For inelastic goods, what will happen to total revenue if prices increase?
For inelastic goods, what will happen to total revenue if prices decrease? Why?
For inelastic goods, what will happen to total revenue if prices decrease? Why?
Why does a firm need to know if their product has elastic or inelastic demand?
Why does a firm need to know if their product has elastic or inelastic demand?
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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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