Module 2

Cindy runs Cindy's Cupcake Shop. She has decided to charge S3 for a gourmet of her customers. What is the market demand that Cindy will face for her five customers, if she charges $3 a cupcake?She knows the individual demand schedules (shown below) for five

21 cupcakes

Change (Shift) in Demand

A change in the quantity of a good, service, or resource demanded at every price. Graphically, an increase in demand is represented by a rightward shift of the demand curve, while a decrease in demand is represented by a leftward shift of the demand curve. Ex: A particularly rainy fall season is likely to cause an increase in demand for umbrellas, as consumers will be more willing to buy them. A rainy fall season is also likely to result in a decrease in demand for shorts and T-shirts because fewer people will be willing to wear them in wet fall weather.

Movement Along the Demand Curve

A change in the quantity of a good, service, or resource demanded due to a change in its price. Graphically, this change is represented as a movement along an existing demand curve.

Normal Good

A good for which there is a direct relationship between the demand for the good and income. For normal goods, n increase in income increases demand, and a decrease in income decreases demand; a good with a positive income elasticity of demand. Ex: When Clara was a college student, her financial resources were limited, and she only owned two pairs of shoes. After she graduated and landed a high-paying job, Clara used her income to buy several new pairs of shoes and an entirely new wardrobe. For Clara, we know that clothing items, such as shoes, are normal goods because when her income increased, her demand for clothing increased and she bought more.

Inferior Good

A good for which there is an inverse relationship between the demand for the good and income. For inferior goods, an increase in income decreases demand, and a decrease in income increases demand; a good with a negative income elasticity of demand. Ex: When Clara was a college student, her financial resources were limited, and she had to eat macaroni and cheese almost every night. After she graduated and landed a high-paying job, she stopped eating mac and cheese and, instead, added favorites like lobster bisque to her menu. For Clara, we know that macaroni and cheese must be an inferior good because when her income increased, her demand for mac and cheese decreased.

Demand Curve

A graphical representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant.

Which is the broadest definition of a market?

A group of buyers and sellers who exchange a good, service, or resource, not necessarily at a specific place.

Law of Demand

A principle in economics that states that as the price of a good, service, or resource rises, the quantity demanded will decrease, and vice versa, all else held constant. If you lower the price of a cup of lemonade, the law of demand tells you that people will be more willing and able to buy a cup of lemonade and quantity demanded will increase.

Demand Schedule

A tabular representation of the relationship between the price of a good, service, or resource and the quantities consumers are willing and able to buy over a fixed time period, all else held constant.

Good

A tangible product that consumers, firms, or governments wish to purchase.

Which of the following can both increase and decrease demand depending on the type of good?

An increase in consumer income

Service

An intangible product or action that consumers, firms, or governments wish to purchase.

Market

Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources. Whether you buy a laptop from your local electronics store, an online retailer, or someone selling a used laptop through eBay, you and the seller are both participating in the market for laptops. Markets can take almost any form. Formal markets, such as the New York Stock Exchange and your local retail store, are highly structured. Informal markets, like swap meets or garage sales, are less structured, with fewer rules.

Which of the following pairs of goods most likely represents substitutes?

Butter and margarine

Which of the following plays a crucial role in determining the demand for a good or service?

Consumer expectation

A new health study was released promoting the benefits of broccoli, As a result, consumer perception of broccoli improves. How will this event change the market for broccoli?

Demand for broccoli will increase at each price.

Suppose goods A and B are substitutes. If the price of good A increases, what happens to good B?

Demand for good B increases

A recession has caused incomes in the United States to fall. How will this impact the market for pizza, a normal good?

Demand for pizza will decrease.

An increase in the number of retired individuals will have what effect on the market for houses in retirement communities?

Demand wil increase at each price.

If consumer preference for cooking at home increases, how will this impact the market for groceries?

Demand will increase at each price.

____ markets are highly structured, whereas ____ markets are less structured with fewer rules.

Formal; informal

Complements

Goods, services, or resources that are used or consumed with one another. Ex: Because they are often eaten together, tortilla chips and salsa are complements. If you decide to buy a jar of salsa because it's on sale, you'll likely pick up a bag of tortilla chips too.

Substitutes

Goods, services, or resources that are viewed as replacements for one another. Ex: In cooking, margarine is often a substitute for butter. If margarine goes on sale, you're likely to buy less butter and instead buy more margarine.

While in college, Jane purchases a significant amount of generic coffee, but after she receives her first paycheck, she no longer purchases the generic brand and instead buys a grocery store name brand. Once Jane has been working for 5 years and has earned several raises, she now purchases luxury coffee from a small, local roaster. What is true about the grocery store name brand coffee based on Jane's behavior?

It starts as a normal good, then becomes an inferior good.

Buyers

Market participants who seek to obtain goods, services, and resources.

Which of the following are reasons the demand curve is downward sloping? (Select all that apply)

Substitution effect Income effect Diminishing marginal utility

Expectations

The anticipation by individuals and firms of costs and benefits that lie in the future.

Which statement best describes the demand curve for most goods and services?

The demand curve is downward sloping.

How is a decrease in demand depicted graphically?

The demand curve shifts to the left.

For normal goods, an increase in income will have what effect on demand?

The demand curve will shift to the right.

The price of hotdogs, a complement to hotdog buns, decreases. How will this affect the market for hotdog buns?

The demand for hotdog buns will increase at every price.

The price of paint, a complement to paint brushes, decreases. Which of the following statements about demand is true?

The demand for paint brushes will increase.

What happens when the prices of complements or substitutes for a product change?

The demand for that product will change.

Income Effect

The effect that a change in the price of a good, service, or resource has on the purchasing power of income. For example, when prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services, or resources. Ex: Suppose you have only $20 to spend on gasoline each week. When the price of gasoline rises from $2 per gallon to $4 per gallon, the purchasing power of that $20 falls from 10 to 5 gallons of gasoline. The resulting decrease in the quantity of gasoline demanded is due to the income effect

Substitution Effect

The effect that a change in the price of one good, service, or resource has on the demand for another. For example, an increase in the price of one good will increase the demand for its substitutes, and vice versa. Ex: Victor usually eats an orange or an apple every day with his lunch. The substitution effect explains why, when he sees the price of oranges increase one week, he substitutes away from oranges and buys more apples instead.

Resource

The inputs used to produce goods and services; also known as factors of production. Resources fall into four categories: land, labor, capital, and entrepreneurial ability. Henry Ford organized resources-land, labor, capital, and his own entrepreneurial ability-in order to produce automobiles.

focuses entirely on the effect of a change in the good's price on the quantity of the product consumed and holds everything else constant.

The law of demand

Diminishing Marginal Utility

The negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time. Ex: For Monica, the first cup of coffee in the morning worth $3; the second cup is worth only $1. So, if the price of coffee is $2 per cup, she buys one cup of coffee. Her first cup of coffee gives her a lot of satisfaction and is worth the price. She doesn't buy a second cup because of diminishing marginal utility: The second cup is worth only $1 to her, so she can't justify paying $2 to buy it.

Market Demand

The overall, or total, demand for a good, service, or resource. It represents the horizontal summation of the quantities demanded by individuals, firms, states, or even nations at each price over a fixed time period, all else held constant.

Tastes and Preferences

The perception of the desirability associated with consuming a good, service, or resource.

Which of the following is a determinant of demand in the market for laptop computers?

The price of desktop computers, a substitute in consumption for laptops.

Quantity Demanded

The quantity of a good, service, or resource that consumers are willing and able to buy at a given price.

The demand for a product will change when the prices of the goods that are complements or substitutes for that product change.

True

A change in quantity demanded is caused by:

a change in a good's own price.

If incomes increase during a period of expansion, goods considered to be inferior will experience:

a decrease in demand at each price.

If less of a good, service, or resource is being consumed at every price, there is:

a leftward shift of the demand curve.

A market is:

a system where buyers and sellers interact to trade goods, services, or resources.

When economists refer to a good," they are referring to:

a tangible product that consumers, firms, or governments wish to purchase.

An inferior good has:

an inverse relationship between demand for the good and income.

The demand schedule represents the relationship between the prices of a good, service, or resource:

and the quantity that individuals and firms are willing and able to buy, all else held constant. in a tabular form.

When economists refer to resources, they are referring to:

any item that is used to produce goods and services.

If the price of tortilla chips decreases, and as a result, you buy more salsa, then tortilla chips and salsa:

are complements.

The law of demand states that:

as the price of a good, service, or resource tises, the quantity demanded will fall, all else held constant.

A market requires:

buyers who are willing and able to purchase the good.

The demand curve:

can be a straight line or a nonlinear curve.

A movement along a demand curve is called a(n) ____ and a shift in a demand curve is called aln)____

change in quantity demanded; change in demand

When hot weather sets in, we would expect that the demand for:

cold drinks increases.

Goods, services, or resources that are consumed together are called

complements

decrease the price of good A will cause an increase in the demand for good B when the two goods are

complements

Consumer expectations play a:

crucial role in determining the demand for a good or service.

If consumers expect prices to fall,:

current demand will fall.

A change in ___ occurs when a nonprice determinant of demand changes.

demand

Suppose the price of burritos at Jack's Burrito Shack fell from $7.00 to $6.00 and the quantity of burritos purchased rose from 25 per hour to 30 per hour. This is consistent with the law of

demand

Tastes and preferences, number buyers, and buyer expectations are all nonprice determinants of

demand

When income changes, ____ can either increase or decrease.

demand

A graphical representation of the relationship between the price of a good, service, or resource and the quantity that individuals and firms are willing and able to buy, all else held constant, describes the:

demand curve.

Suppose there is a reputable, scientific study that finds substantial health benefits associated with the consumption of pizza. In this case, we expect:

demand for pizza to increase

A normal good, as opposed to an inferior good, is a good for which:

demand increases as income increases.

Without individuals and households that are willing and able to buy a good, the ___ side of the market cannot exist.

demand or consumer

The terms "normal" and "inferior" refer to what happens to:

demand when income changes.

Prices of related goods, complements and substitutes, are:

determinants of demand.

Competition among suppliers tends to drive prices ____ competition among buyers tends to drive prices ____

down; up

A movement along the demand curve is:

due to a change in the quantity demanded.

Demand, demand curve, and demand schedule are three different ways of:

expressing information about the demand for a good, service, or resource.

One of the determinants of demand is the anticipation of _____ prices by consumers.

future

Assuming a downward-sloping demand curve and a change in price, all else held constant

generates a change in quantity demanded.

As a winter storm approaches, we would expect that the demand for:

generators increases.

A(n) ____ is a tangible product that consumers, firms, or governments wish to purchase.

good

When graphing a demand curve, we always place quantity demanded on the ____ axis.

horizontal

Suppose you have $30 to spend on tacos each week. When the price of tacos decreases from $3.00 to $2.00, the purchasing power increases from 10 tacos per week to 15 tacos per week. This increase in the quantity of tacos demanded illustrates the _____ effect

income

If the number of buyers increases, the demand will:

increase and the curve will shift to the right.

Generally, in a perfectly competitive market,:

individuals do not directly influence the prices, but collectively all individuals have an effect on price.

For ____ goods, an increase in income decreases demand, and a decrease in income increases demand.

inferior

When the price of a good rises, we can expect that:

less of the good will be purchased.

Informal markets,

like swap meets or garage sales, are less structured, with fewer rules.

A(n) _____ refers to a group of buyers and sellers who exchange one specific good, service, or resource, not necessarily at a specific place.

market

The overall or total demand for a good, service, or resource is called

market demand

Any place where, or mechanism by which, buyers and sellers interact to trade goods, services, or resources is a called a(n):

market.

A small hatchback car, that is a normal good in a low-income country.

may be an inferior good in high-income countries

When there is an increase in demand,:

more is demanded at every price.

Diminishing marginal utility describes the:

negative relationship between the quantity of a good, service, or resource and the marginal utility obtained from each additional unit consumed in a given period of time

Tastes and preferences, the number of buyers, and buyer expectations are:

nonprice determinants of demand.

A good for which there is a direct relationship between the demand for the good and income is aln)

normal good

Market demand is based on the:

overall preferences of everyone in the market.

The perceived desirability of consuming a good, service, or resource refers to the tastes and _____ of buyers.

preferences

A change ____ in all else held constant, generates a change in quantity demanded.

price

When a non ___ determinant of demand changes, the demand curve shifts.

price

The income effect is the effect that a change in the:

price of a good, service, or resource has on the purchasing power of income.

The substitution effect is the effect that a change in the:

price of one good, service, or resource has on the demand for another.

When graphing a demand curve, we place ____ on the y-axis and ____ on the x-axis

price; quantity demanded

In most markets, ____ are determined by the interactions of numerous buyers and sellers.

prices, quantities, price, or quantity

There is an inverse relationship between price and ___ demanded,

quantity

Any Item, whether a gift of nature, the result of production, or the result of human effort, that is used to produce goods and services is a

resource

An intangible product or action that consumers, firms, or governments wish to purchase is a:

service.

According to the law of demand, lower prices lead to a higher quantity demanded. As a result, the demand curve:

should slope down.

The demand curve shifts when:

something other than the price of a good changes.

The terms "normal" and "inferior" are:

subjective to the incomes of people.

If the price of chicken increases and, as a result, you buy more pork and less chicken (even though the price of pork has not changed), then chicken and pork are:

substitutes.

When the price of oranges increases, Jack buys more apples and fewer oranges. The decrease in the quantity demanded for oranges and the increase in the quantity demanded for apples is an example of the

substitution effect

Formal markets,

such as the New York Stock Exchange and your local retail store, are highly structured.

The perceived desirability of consuming a good, service, or resource refers to the

taste and preferences of buyers.

An increase in demand is depicted graphically as:

the demand curve will shift to the right.

When income decreases,:

the demand for an inferior good increases.

Suppose that you only eat hot dogs on a hot dog bun and you never eat hot dog buns without a hot dog. If the price of hot dog buns increases:

the demand for hot dogs decreases.

Without individuals and households that are willing and able to purchase a good:

the demand side of the market cannot exist.

When there is a change in demand,:

the entire demand curve shifts to the right or left.

When a nonprice determinant of demand changes.:

the entire demand curves shifts.

When considering how changes in tastes and preferences or demographics affect demand, we tend to evaluate:

the entire market.

The market demand represents:

the horizontal summation of individual demand curves.

In a "market."prices and quantities traded are determined mostly by:

the interaction of buyers and sellers in a market.

Other things held constant, the demand curve will shift when:

the nonprice determinants of demand change.

Demand for a good, service, or resource will increase when:

the number of buyers increases.

When two goods are substitutes:

the price of a good and the demand for its substitute are positively related.

The interaction of buyers and sellers in a market is fundamental for the determination of

the price of goods and services

Jack likes tacos. He values the first taco he eats at $5.00, the second taco at $4.00, the third taco at $3.00, and the fourth taco at $2.00. If the price of tacos is $2.50, Jack will buy ____ tacos

three

When eating pizza, you value the first, second, third, and fourth slices of pizza at $10, $7, $5, and $3, respectively. This decrease in the value you place on each additional slice is called diminishing marginal

utility or benefit

When we graph the relationship between price and quantity demanded:

we call the result a demand curve, but demand curves are often drawn as straight lines.

The entire demand curve shifts to the right or left:

when there is a change in demand.

The income effect, the substitution effect, and diminishing marginal utility explain:

why the quantity demanded will fall when prices rise.

A demand curve and demand schedule express information about the:

willingness and ability to purchase a good.

The demand curve for a normal good is downward sloping because

•as prices rise, the purchasing power of each dollar earned falls, and consumers are willing and able to buy less of a good. •when consumers purchase substitutes, the quantity demanded of the good falls, •the benefit of consuming more of a good falls with each additional unit, so the price consumers are willing and able to pay also falls with increased consumption.