Topic 3.1 2 & 3 Economics Key terms and Assessment Questions

Non-price determinants

factors other than price that can affect demand for a particular good or service.

How elasticity is calculated

take the percentage change in the quantity of the good demanded, and divide this number by the percentage change in the price of the good.

Quantity Demand

the amount of products that people are willing to buy

income effect

the change in consumption that results in response to changes in price

Demand

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

What factors determine a company's total revenue?

A company's total revenue is defined as the amount of money the company receives by selling its goods. This is determined by two factors: the price of goods and the quantity sold.

What is the main difference between a market demand curve and a market demand schedule?

A market demand curve is a graphic representation of a market demand schedule.

Original Demand

An ordinary demand curve shows the general relationship between price and quantity demanded, ceteris paribus.

Changing Income

Change in income can have a large impact on demand.

Why does demand generally become more elastic over time?

Consumers do not always react quickly to a price increase, because it takes time to find substitutes. Because they cannot respond quickly to price changes, their demand is inelastic in the short term.

Lack of substitutes

Customers are less price sensitive when they have fewer options.

Demand is more than just the desire to buy something. What else does it require?

Demand requires a good or service, both of these conditions must be present.

Large share of budget

Elastic

What factors affect elasticity of demand?

Elasticity of demand is affected by the availability of substitute goods, how much of a budget is spent on the good, the perception of the good as a necessity or a luxury, and price changes over time.

Changing price affects quantity demand

Illustrate how a change in price can lead to change in quantity demanded.

The closing of a major factory in a city is likely to affect which non-price determinants of demand most strongly in the short term?

Income

When the price of a car model Tino planned to buy rose, he bought a different brand instead. Which economic principle does this demonstrate?

It demonstrates the substitution effect. It takes place when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good.

How does ceteris paribus relate to demand?

It relates to demand because it considers the effects of news reports or any one of thousands of other factors that change from day to day.

If you buy less clothing the price of clothing at your favorite store has gone up, what has happened?

The Income effect

In order for demand for a good to be present, what two conditions must be present?

The quantity that people demand the product and how much they would pay for it.

According to the substitution effect, what are consumers likely to do if price of leading brand of orange juice increases?

When the price increases, consumers have an incentive to buy an alternative as a substitute for the leading brand of orange juice.

How would you expect an increase in the price of a good to affect its demand curve?

When the price is higher, the quantity demanded is lower.

elasticity of demand

a measure of the way quantity supplied reacts to a change in price

Substitutes

goods that are used in place of one another

Demographics

the statistical characteristics of populations and population segments, especially when used to identify consumer markets

total revenue

the total amount of money a company receives bu selling goods or services

Complements

two goods that are bought and used together

Substitution Effect

when a consumer reacts to a rise in the price of one good by consuming less of that good and more of a substitute good

What effect does a rise in income have on demand?

A consumer's income affects his or her demand for most goods. Most items that we purchase are normal goods, goods that consumers demand more of when their incomes increase.

How does a change in demand relate to a demand curve?

A demand curve is accurate only as long as the ceteris paribus assumption is true. When the price changes, we move along the curve to a different quantity demanded.

What does a shift in the demand curve indicate about demand for a particular good?

A shift in the demand curve indicates if the demand increased or decreased depending on that particular good.

Demand shifts

A shift in the demand curve means that at every price, consumers buy different quantity than before. This shift of the entire curve is what economists refer to as a change in demand.

Non-price determinants shift demand right

Non-Price determinants can also increase demand. This shift in demand results in a new demand curve to the right of the original demand curve.

(A) How does the percentage of your budget you spend on a good affect its elasticity? (b) Why is this the case?

(A) The more of your budget you spend on a good, the less you'll want to spend on it if the price increases. This change is elastic. (b) Because if you spend little on a good the less of a price change will affect you. The more you spend on a good the more a rise in price will affect you.

Identify an example of a non-price determinant for fuel-efficient cars that might cause a demand shift to the right. Identify another example that might cause a shift to the left.

An example of a non-price determinant for fuel-efficient cars that might cause a demand shift to the right is traveling in far distances because the price of gas differs. Another example that might cause a shift to the left for fuel-efficient cars is traveling in the city because the price of gas rises.

Give an example of how businesses use demographic information.

Analysts predict that by 2050, Hispanic Americans will make up 29 percent of the U.S. Population. Such demographic changes have profound implications for the marketplace. As the purchasing power of Hispanic Americans grows, firms will devote more of their resources to producing goods and services demanded by these consumers.

Population Change

As populations rise and fall, the demand for goods and services tends to follow. For example, in parts of the country that are gaining population--like the Texas community shown in this photo--demand for schools and other services goes up.

Think about the way businesses try to influence consumers' behavior. Make a list of all the ways businesses tried to influence you in the past 24 hours. For example, how many ads did you see?

Cellphones, social media, digital media, online games, television programs, internet searches, websites etc.

What does an individual demand schedule do?

It shows the demand schedule of an individual person depending on the product.

Why might it be a good idea for a small business owner to create a market demand schedule?

It would be a good idea because if they follow the demands of the people, they would bring in more consumers.

When the cost of a taxi ride rose, Martina started packing a lunch instead of going to a restaurant. Which economic principle does this demonstrate?

The income effect. Its the change in consumption that results in response to changes in price.

Suppose demand for a product is elastic at a given price. What will happen to the company's total revenue of it raises the price of that product? Why?

The company's total revenue would go down if they raise the price because everyone would by the cheaper alternative.

Why does a firm need to know whether demand for its product is elastic or inelastic?

The elasticity of demand determines how a change in prices will affect a firm's total revenue, or income.

Non-price determinants shift demand left

The entire demand curve shifts to the left if some non-price determinant reduces demand. This new decreased demand differs from the change in quantity demanded when price changes.

Do higher prices lead to increased revenues for a company?

The law of demand tells us that increase in price will decrease the quantity demanded. When a good has an elastic demand, raising the price of each unit sold by 20 percent will decrease the quantity sold by a larger percentage, say 50 percent.

Advertising

The purpose of advertising is to cause consumers to experience or recognize greater demand for a good or service.

What does the law of demand imply?

The result will always be negative (increase of price = quantity demanded decreases) (Decrease of price = quantity demanded increases)

Consumer Tastes

The tastes and preferences of consumers change often, and, in many cases, wildly.

How do non-price determinants affect demand?

They affect demand depending on certain factors for a good or service. They are factors that can lead to the shifting of demand up or down. Non-price determinants include income, consumer expectations, population, demographics, and consumer tastes and advertising.

consumer expectations

What you expect prices to do in the future can influence your buying habits today.

Ceteris Paribus

a Latin phrase that means "all other things held constant"

Inferior Good

a good that consumers demand less of when their incomes increase

Normal good

a good that consumers demand more of when their incomes increase

What is a market demand curve?

a graph showing how much of a product a market is willing and able to buy

demand curve

a graphic representation of a demand schedule

What would you expect to be the impact of an event such as a forecast of a major storm on demand for storm-related supplies?

a shift in the demand curve to the right

market demand schedule

a table that lists the quantities demanded of a good at various prices by all consumers in the market

demand schedule

a table that lists the quantity of a good that a person will purchase at various prices in a market

Law of Demand

consumers will buy more of a good when its price is lower and less when its price is higher

What happens when the cost of apples increases?

consumption of apples decreases

inelastic

describes demand that is not very sensitive to price changes

elastic

describes demand that is very sensitive to a change in price

unitary elastic

describes demand whose elasticity is exactly equal to 1

small share of budget

inelastic