Questions and Answers
What is demand?
The desire to have some good or service and the ability to pay for it.
What does the law of demand state?
When the price of a good or service falls, consumers buy more of it.
What is a demand schedule?
A table that shows how much of a good or service all consumers are willing and able to buy at each price in a market.
What is a demand curve?
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What does the market demand curve represent?
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What is the law of diminishing marginal utility?
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What is the income effect?
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What is the substitution effect?
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What is a change in quantity demanded?
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What is a change in demand?
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What are normal goods?
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What are inferior goods?
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What are substitutes?
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What are complements?
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What does elasticity of demand describe?
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What does it mean if demand is elastic?
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What does inelastic demand mean?
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What does unit elastic mean?
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What is total revenue?
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What is the total revenue test?
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When prices fall, demand goes up.
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When prices rise, demand falls.
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What assumption are the demand curve and demand schedule based on?
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What category does Vera Wang primarily belong to?
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What are the six factors that change demand?
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What does an increase in income imply for consumer buying habits?
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What happens to demand when market size shrinks?
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How do consumer tastes affect demand?
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How can consumer expectations influence their buying habits?
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What defines unit elasticity?
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What are the three factors that determine elasticity of demand?
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What is the effect of having no substitutes for a good or service on its elasticity?
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How does the proportion of income relate to elasticity?
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Are luxuries typically considered elastic or inelastic?
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What does the total revenue equation represent?
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Study Notes
Demand Concepts
- Demand refers to the desire for a good or service combined with the ability to pay for it.
- The law of demand indicates that as the price of a good falls, consumers are likely to purchase more of it.
- A demand schedule presents a table showing the quantities of a good or service consumers are willing to buy at various prices.
Graphical Representations
- A demand curve is a graphical illustration depicting the quantity of a good demanded at different price levels.
- The market demand curve compiles data from the market demand schedule, reflecting total demand at varying prices.
Economic Principles
- The law of diminishing marginal utility states that the additional satisfaction from consuming more units of a good typically declines with each unit.
- The income effect explains how changes in consumers' purchasing power (due to income changes) alter their buying behavior.
- The substitution effect highlights consumers' tendency to purchase substitute goods when the price of a preferred good rises.
Changes in Demand
- A change in quantity demanded occurs solely due to price changes, whereas a change in demand is driven by broader market factors, like economic conditions influencing consumer preferences.
- Normal goods experience increased demand when income rises, while inferior goods see decreased demand as income increases.
Product Relationships
- Substitutes are goods used in place of others; a rise in the price of one often increases demand for its substitute.
- Complements are products that are typically used together; increased usage of one complements the demand for the other.
Elasticity of Demand
- Elasticity of demand indicates how sensitive consumer demand is to price changes; it can be elastic (large change in quantity demanded) or inelastic (small change in quantity demanded).
- Unit elasticity occurs when price changes and quantity demanded change by the same percentage.
Revenue Considerations
- Total revenue represents the financial intake from selling goods, calculated by multiplying price by quantity (P x Q).
- The total revenue test provides insights into demand elasticity by comparing revenue across different price points.
Factors Influencing Demand Change
- Demand can be influenced by income levels, market size changes, shifts in consumer tastes, expectations for future prices, and availability of substitute and complementary goods.
- Growing markets typically see increasing demand, while decreasing markets lead to reduced demand.
Demand Characteristics
- Consumer tastes play a pivotal role; popularity of a product can significantly impact demand.
- Consumer expectations regarding price trends influence purchasing behaviors today based on anticipated future prices.
- When assessing elasticity, substitutes, proportion of income spent, and the nature of the good (necessity versus luxury) are crucial factors.
Recap of Elasticity
- Goods with few substitutes tend to be inelastic, while those costing little in relation to income tend to remain inelastic.
- Luxuries are generally more elastic than necessities, which tend to maintain stable demand even with price changes.
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Description
Test your understanding of demand concepts in economics. This quiz covers the law of demand, demand schedules, and graphical representations like demand curves. Explore economic principles such as diminishing marginal utility, the income effect, and the substitution effect.