Chapter 4: Demand

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If goods A and B are complements, then an increase in the price of good A will result in a leftward movement along the demand curve of A and cause a shift in; less of each good will be demanded. A decrease in the price of A will result in a rightward movement along the demand curve of A and cause the demand curve of B to shift outward; more of each good will be demanded. Example of complementary goods: cereal and milk, coffee and creamer, etc.

How do complements affect demand?

The total expenditures test compares the direction of a price change to the direction of change in total revenue or total expenditures. With elastic demand, a change in price moves in the opposite direction from the change in revenue.

How does the total expenditures test help determine demand elasticity?

Change in Quantity Demanded

Movement along the demand curve showing that a different quantity is purchased in response to a change in price.

Complements

Products that increase the use of other products.

Substitution Effect

The change in quantity demanded that is due to change in the relative price of the good.

Law of Demand

The claim that, other things being equal, the quantity demanded of a good falls when the price of the good rises.

Demand Elasticity

The extent to which a change in price causes a change in the quantity demanded.

Marginal Utility

The extra usefulness or satisfaction a person gets from acquiring or using one more unit of a product.

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

What are the characteristics of demand?

Data.

What is the demand schedule best described as?

An increase in income will cause demand to rise and a decrease in income causes demand to fall.

What is the relationship between income and demand?

When the price of a product increases, the quantity demanded tends to drop. When the price of a product decreases, the quantity demanded tends to rise.

What is the relationship between quantity demanded and price?

The total expenditure that buyers make when purchasing a good depends on the price elasticity of demand. The price elasticity of demand is the relative change in quantity demanded due to a change in price. Total expenditure is price times quantity demanded.

What is the total expenditures test and how do you determine total expenditure?

Something is elastic when the price changes and so does the demand. Something is inelastic when the price changes and it doesn't really affect the demand.

What makes an item or service elastic or inelastic?

The total revenue test, it determines whether demand is elastic or inelastic. If an increase in price causes an increase in total revenue, then demand can be said to be inelastic, since the increase in price does not have a large impact on quantity demanded.

What test do economists use to measure elasticity?

Inversely

When an increase in one variable causes a reduction in the other variable.

Income Effect

A change in the quantity demanded caused by a change in a consumers income when price of a product changes.

Demand

A consumers' willingness and ability to consume a given good.

Demand Curve

A graph of the relationship between the price of a good and the quantity demanded.

Demand Schedule

A table that lists the quantity of a good a person will buy at each different price.

Incentive

A thing that motivates or encourages one to do something.

Change in Demand

Consumers demand different amounts at every price, causing the demand curve to shift to the left or the right.

Microeconomics

Deals with behavior and decision making by small units such as individuals and firms.

Diminishing Marginal Utility

Decrease in satisfaction or usefulness from having one more unit of the same product.

Inelastic

Describes demand that is not very sensitive to a change in price or income.


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