Ch 4 econ test

Complements

2 goods that are brought and used together

Demand Curve

a graphic representation of a demand schedule.

Substitutes

goods that are used in place of one another

Law of demand

consumers will buy more of a good when prices are low and less when prices are high

luxuries are

elastic

Inferior good

a good that consumers demand less of when their income increases

Normal good

a good that consumers demand more of when their income increases

Ceteris Paribus

a latin phrase that means "all things held under constant," Deals with movement along the curve

Elasticity of demand

a measurement of how drastically consumers respond to price changes.

Demand Schedules

a table that lists the quantity of a good that a person will purchase at various prices in the market. They show that demand for a good falls as the price rises.

Elastic

describes demand that is very sensitive to price change

Inelastic

describes demand that isn't very sensitive to price change

a shift in the demand curve means that at every price, consumers buy a

different quantity than before

increase in price and decrease in total revenue=

elastic demand

Why does the demand curve shift?

many factors can cause the demand curve to shift including change in price of related goods, change in people's income, consumer expectations, consumer tastes & demographics, and advertising. Usually other than price

elastic demand can be identified by

many substitues, expensive, time to plan or adjust

Market Demand Schedules

shows the quantities demanded at various prices by all consumers in the market. Used to predict total sales of a commodity at several different prices.

The income effect

the change in consumption that results when a price increase causes real income to decline. Also works when a price lowers by feeling wealthier and buying more.

Demand

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

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 by selling goods or services

the elasticity of demand determines how a change in price will affect a firm's

total revenue(income)

How to calculate elasticity

(Q2-Q1)/[(Q1+Q2)/2] (P2-P1)/[(P1+P2)/2] drop the negative sign. if the number is less than one, it's an inelastic demand. if the number is greater than 1, it's an elastic demand.

Elastic demand comes from one or more of these factors:

1. the availability of substitute goods: if there are few substitutes for a good, then even when its price rises greatly, you might still buy it. if the lack of substitutes can make demand inelastic, a wide choice of substitute goods can make demand elastic. 2. a limited budget that doesn't allow for price changes: the relative importance or how much of your budget you spend on a good. 3. the perception of a good as a luxury item 4. Change over time: consumers don't always react quickly to a price increase because it takes time to find substitutes. because they cant respond quickly to price changes, their demand in inelastic in the short term. demand sometimes becomes more elastic overtime as people find substitutes or adjust their budget

inelastic demand can be identified by

few substitutes, inexpensive, must buy now

the more available a good is, the prices goes

down

if you buy much less of a good after a small price increase, your demand for that good is

elastic

A decrease in price and increase in total revenue=

elastic demand

Total revenue and inelastic demand

if demand is inelastic, consumers' demand isn't very responsive to price changes. If price increases, the quantity demanded will decrease but by less than the percentage of the price increase. This will result in higher total revenues

How will an anticipated rise in price affect consumer demand for a good?

if you expect the price of a good to rise, you'll buy it sooner. if you expect it to drop, your current demand for it will fall and you'll wait for the lower price

The 5 factors that change demand curves left and right

income, consumer expectations, population, demographics, and consumer tastes & advertising

necessities are

inelastic

your demand for a good that you will keep buying despite a price change is

inelastic

a decrease in price and decrease in total revenue =

inelastic demand

a change in determinant(consumer tastes, etc.)-change in demand which means

the curve shifts left or right of the existing curve. Left indicates a decrease in quantity demanded at all prices and right indicates an increase in quantity demanded at all prices

a change in price=change in quantity demanded which means

the movement is on the curve

Market Demand Curve

are only accurate for one very specific set of market conditions. Cannot predict changing market conditions

increase in price and increase in total revenue =

inelastic demand

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

it can help the firm make pricing decisions that lead to the greatest revenue. if a firm knows that the demand for its product is elastic at the current price, it knows that an increase in price would reduce total revenue and if the demand for its product is inelastic at its current price, it knows that an increase in price will increase total revenue

How does the law of demand affect the quantity demanded?

the law of demand states that as the price of a good/service rises, the quantity demanded of that good/service will decrease and when the price of a good/service falls, the quantity demanded of that good/service rises.

Total revenue and elastic demand

when a good has elastic demand, raising the price of each unit sold by 20% will decrease the quantity sold by a larger percentage. The quantity sold will drop enough to reduce the firm's total revenue. the same process can also work in reverse. if the price is reduced by a certain percentage, the quantities demanded could rise by an even greater percentage and in this case, total revenue would increase

Substitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of a substitute good