Econ Chapter 4 Test Review Demand

What is a demand schedule called when it's represented as a graph?

a demand curve

Why does the demand curve shift.

A demand curve can shift when the demand of a particular good increases or decreases. Some determinants that can cause this would be advertising, population, demographics, substituent goods, complementary goods, income, and consumer expectations. While price change can affect the quantity demanded, it only moves along the curve.

Describe changes in demand.

A demand schedule takes into account only changes in price. It does not consider the effects of news reports of any one of the thousands of other factors that change from day to day that could affect the demand for a particular good. A demand curve is accurate only as long as there are no changes other than price that could affect the consumer's decision. A demand curve is accurate only as long as the ceteris paribus assumption—that all other things are held constant—is true. When we drop the ceteris paribus rule and allow other factors to change, we no longer move along the demand curve. Instead, the entire demand curve shifts. A shift in the demand curve means that at every price, consumers buy a different quantity than before; this shift of the entire demand curve is what economists refer to as a change in demand.

What is a market demand curve?

A market demand curve is a graphic representation of a demand schedule for a set good or service in the entire marketplace. The possible prices are listed on the vertical axis, with the lowest possible price being at the bottom and the highest possible price at the top of the graph. Along the horizontal axis is the measure of quantity demanded, with the lowest possible demand being at the left and the highest possible demand at the right. Then, using a demand schedule, points are placed on the graph and connected to show the relationship between the price and quantity demanded of a good or service. They can be used to predict reactions to changes in price or conditions in the marketplace. It shows the quantity demanded for a set product in the entire market.

Describe how relative importance affects elasticity

A second factor in determining a good's elasticity of demand is how much of your budget you spend on a good.

Describe a change in demand by consumer tastes/advertising

Advertising is a factor that shifts the demand curve because it plays an important role in many trends. Companies spend money on advertising because they hope that it will increase the demand for the goods they sell.

Describe market demand curves

All demand schedules and demand curves reflect the law of demand. Market demand curves are only accurate for one very specific set of market conditions. They cannot predict changing market conditions.

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

An anticipated rise in price will make people buy more now before the price increases. Consumers want to buy goods at the lowest possible price, so if the price is expected to increase, they'll want to get it now when the price is lower. When the price is expected to go down, consumers will want to buy less now and wait for the price to go down to get the best deal.

What is the difference between complement and substitute goods? Why does the change in demand for these two goods follow different patterns?

Complementary goods are ones that are bought and used together. When the demand of a hood goes up, the complement's demand goes up. This is because the two complementary goods are being bought together, so when people want to buy more of a good like peanut butter, they are also more likely to buy more of its complementary good, jelly. The two goods are being used together so they're in demand together. However, substitute goods are goods that are purchased in place of one another. When the demand for a good goes up, the demand for its substitute goes down. This is because the two goods are competing against each other for the consumers' dollars. When the demand for an object like beef increases, the demand for its substitute, chicken, will decrease because more people will want to buy the cheaper substitute.

How do economists calculate elasticity?

Economists calculate elasticity by first finding the percent change in quantity demanded of a good. They subtract the new quantity demanded from the original quantity demanded and divide it by the original quantity demanded. They then take this number and multiply it by 100. Next, they find the percent change in the price by subtracting the new price from the original price, and divide it by the original price. They then take this number and multiply it by 100. Finally, they divide the the change in quantity demanded by the change in price to get the elasticity of demand. When this answer is more than 1, the demand is elastic. When it's less than 1, the demand for the good is inelastic. When the number is 1, the demand is unitary elastic.

How is a firm's total revenue affected by elasticity

Elasticity is important to the study of economics because elasticity helps us measure how consumers respond to price changes for different products. The elasticity of demand determines how a change in price will affect a firm's total revenue or income.The law of demand states that an increase in price will decrease the quantity demanded. 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. In this case, total revenues would increase. If demand is inelastic, consumers' demand is not very responsive to price changes. If prices increase, the quantity demanded will decrease, but by less than the percentage of the price increase. This will result in higher total revenues. Elasticity of demand determines the effect of a price change on total revenues.

Describe consumer response to price changes.

Elasticity of demand is the way that consumers respond to price changes; it measures how drastically buyers will cut back or increase their demand for a good when the price rises or falls. Your demand for a good that you will keep buying despite a price change is inelastic. If you buy much less of a good after a small price increase, your demand for that good is elastic.

Describe a change in demand by income.

Most items that we purchase are normal goods, which consumers demand more of when their income increases. A rise in income would cause the demand curve to shift to the right, indicating an increase in demand. A fall in income would cause the demand curve to shift left, indicating a decrease in demand.

Describe a change in demand by consumer expectations

The current demand for a good is positively related to its expected future price. If you expect the price to rise, your current demand will rise, which means you will buy the good sooner. If you expect the price to drop your current demand will fall, and you will wait for the lower price.

Describe the income effect

The income effect is the change in consumption that results when a price increase causes real income to decline. Economists measure consumption in the amount of a good that is bought, not the amount of money spent on it. The income effect also operates when the price is lowered. If the price of something drops, you feel wealthier. If you buy more of a good as a result of a lower price, that's the income effect at work.

Describe demand schedules

The law of demand explains how the price of an item affects the quantity demanded of that item. To have demand for a good, you must be willing and able to buy it at a specified price. A demand schedule is a table that lists the quantity of a good that a person will purchase at various prices in the market. Demand schedules show that demand for a good falls as the price rises.

How does the law of demand affect the quantity demanded? CT Question

The law of demand states that when a good's price is higher, consumers will buy less of it, and when a good's price is lower, consumers will buy more of it. Since people buy less of a good when it's offered at a higher price, the quantity demanded of that good is decreased for each price increase. Quantity demanded refers to how much people are willing to purchase a good based on a specific price. As a result, when the price of a good increases, the quantity demanded decreases and when the price of a good decreases, the quantity demanded decreases. This happens because of the law of demand, the idea that quantity demanded changes when the price of a good increases or decreases.

Describe the substitution effect.

The substitution effect 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. The substitution effect can also apply to a drop in prices.

What factors affect elasticity of demand?

There are 4-5 main factors that affect elasticity of demand. This includes change over time, availability of substitutes, income, relative of importance, and the difference between luxury and necessity.

Under the substitution effect, what will happen when the price of a good drops?

Under the substitution effect, when the price of a good drops, more people will buy that good and less of a substitute good. The substitution effect states that consumers react to a rise in the price of one good by consuming less of that good and more of a substitute good. Therefore, when the price of a good drops, people will switch to buying more of that good, and less of its substitute good. As a result, the demand curve of this good will shift to the right, and the demand curve of the substitute good will shift to the left, meaning more of the good is being bought and less of the substitute good is being bought.

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

When a shift in the demand curve of a particular curve occurs, it says that at any point on the graph, the prices of a good will be either higher or lower than normal. It can be because of any of the determinants involved in shifting the demand curve. This includes advertising, population, demographics, substituent goods, complementary goods, income, or consumer expectations. When the curve shifts, the demand and willingness to pay for a particular good has either increased or decreased. The quantity demanded will change when the price increases or decreases.

Describe demand curves

A demand curve is a graphic representation of a demand schedule. The vertical axis is always labeled with the lowers possible prices at the bottom and the highest prices at the top. The horizontal axis should be labeled with the lowest possible quantity demanded at the left and the highest possible quantity demanded on the right.

If demand for a good is inelastic, how will a drop in price affect demand for the good?

A drop in the price of an inelastic good won't change the demand for the good. When something is inelastic, it means that no matter what the price is, the demand for that good will not change. Consumers will continue to buy it whether it is at a high or low price. It could also increase a small amount since the price lowers, the law of demand suggests that consumers might be more attracted to buy that product.

Describe market demand schedules

A market demand schedule shows the quantities demanded at various prices by all consumers in the market. Market demand schedules are used to predict the total sales of a commodity at several different prices. Market demand schedules exhibit the law of demand: at higher prices the quantity demanded is lower.

What happens to the demand for a good when the price increases?

Changes in price are an incentive; price changes always affect the quantity demanded because people buy less of a good when its price goes up.

Describe a change in demand by population.

Changes in the size of the population will also affect the demand for most products. Population trends can have a particularly strong effect on certain goods.

Describe how change over time affects elasticity

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. Demand sometimes becomes more elastic over time as people eventually find substitutes.

Describe Demand

Demand is the desire to own something and the ability to pay for it. The law of demand states that when a good's price is lower, consumers will buy more of it. When the price is higher, consumers will buy less of it. The law of demand is the result of the substitution effect and the income effect-two ways that a consumer can change his/her spending patterns. Together, they explain why an increase in price decreases the amount of consumer's purchase.

Describe a change in demand by demographics

Demographics are the characteristics of populations, such as age, race, gender, and occupation. Businesses use this data to classify potential customers. Demographics also have a strong influence on packaging, pricing, and advertising. Hispanics, or Latinos are now the largest minority group in the United States. Firms have responded to this shift by providing products and services for the growing Hispanic population.

When factors affect elasticity of demand?

Economists have developed a way to calculate how strongly consumers will react to a change in price. Original price and how much you want a particular good are both factors that will determine your demand for a particular product.

What are the factors that affect the elasticity of demand?

Elastic Demand comes from one or more of these factors: The availability of substitute goods A limited budget that does not allow for price changes The perception of a good as a luxury item.

What is elasticity of demand?

Elasticity of demand is a measure of the way people react when the price of a good or service increases or decreases. Depending on this concept, a good will either be marked as elastic or inelastic. Elastic goods have a higher chance of having a change in demand depending upon the price of the good or service. Inelastic goods however, are bought no matter what the price is. The demand for these goods don't change.

If demand for a good is elastic, what will happen when the price increases?

If the price increases for a good that is elastic, the demand for that good will decreases. When something is elastic, it means that the demand for the good changes depending on its price. When the price goes up, the demand goes down, and when the price goes down, the demand goes down. Consumers will find substitutes for that good that are priced lower.

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

If a company raises the price of an elastic product, the company will lose money and their total revenue will decrease. Consumers will demand less of the product and will switch to purchasing substitutes that are offered at a lower price. Companies will therefore lose money and they'll have to come up with ideas to still bring in more consumers and attract more to make money back.

If the demand for a good increases, what will happen to the demand for its complement?

If the demand for a good increases, the demand for its complement will increase as well. Complementary goods are described as goods that are bought and used together. Since they are purchased together, a good will generally follow the same change as its complement. For example, when the demand for peanut butter increases, the demand for jelly will likely increase as well, since those two goods are complements and are purchased together.

Describe how availability of substitutes affects elasticity

If there are a 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.

How do you calculate elasticity of demand?

In order to calculate elasticity of demand, 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. The result is the elasticity of demand for the good. The law of demand implies that the result will always be negative. This is because increases in the price of a good will always decrease the quantity demanded, and a decrease in the price of a good will always increase the quantity demanded. If the elasticity of demand for a good at a certain price is less than 1, the demand is inelastic. If the elasticity is greater than 1, demand is elastic. If elasticity is exactly equal to 1, demand is unitary elastic.

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

Knowledge of how the elasticity of demand can affect a firm's total revenues helps 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. If a firm knows that the demand for its product is inelastic at its current price, it knows that an increase in price will increase total revenue.

Name at least three goods that could be bought as complements to hamburgers.

One good that could be bought as a complement to hamburgers would be hamburger rolls/buns. Another good would be cheese to put on the burgers. A third good would be ketchup as a topping for the burger. Some other complementary goods could be barbeque sauce, relish, onions, or even devices like a grill, tongs, or spatula.

List at least three goods that could be considered substitutes for movie tickets

One good that could be considered a substitute for movie tickets could be cable TV. When going out to the movies is too expensive, people may try to stay home and watch movies on TV instead. Another good would be streaming services. Services like Netflix and Hulu can be used to view movies and TV shows from people's home, and costs less monthly. A third good that could be considered a substitute for movie tickets is DVDs. Instead of paying for movie tickets, a person could go out to the store and buy or rent a DVD to watch instead.

How does the law of demand affect the quantity demanded?

Price changes always affect the quantity demanded because people buy less of a good when the price goes up. By analyzing demand schedules and demand curves, you can see how consumers react to changes in price.

Why does the demand curve shift?

Shifts in the demand curve are caused by more than just price increases and decreases. Other factors include: Income Consumer Expectations Population Demographics Consumer Tastes and Advertising Substitute goods Complimentary goods

Suppose you are about to buy a new pair of shoes. Assume that the price of the shoes will not change. What other factors could affect your demand for the shoes?

Some other factors that could affect the demand for the shoes regardless of the price are advertising, population, demographics, substituent goods, complementary goods, income and consumer expectations. The determinants would shift the demand curve for the shoes to the left or right, signifying a change in the demand for the shoes.

Describe a change in demand by compliments and substitutes

The demand curve for one good can also shift in response to a change in demand for another good. There are two types of related goods that interact this way: Complements are two goods that are bought and used together. Substitutes are goods that are used in place of one another.

What is the difference between the substitution effect and the income effect?

The substitution effect refers to the idea that consumers react to a rise in the price of one good by consuming less of a substitute good. With this effect, consumers choose between two substitute products depending on their competing price. Income effect however, refers to the idea of the change in consumption when a price increase causes real income to decline. When the price increases, our income decreases since what we have is being depleted faster. For example, when the price of a good decreases, people tend to feel wealthier since they're saving money, and will actually buy more of that good. Substitution effect focuses on using substitute goods based on price increases, while income effect focuses on buying more or less of the same goods when the price changes.

Describe graphing changes in demand

When factors other than price cause demand to fall, the demand curve shifts to the left. An increase in demand appears as a shift to the right.

What happens to the demand for a good when the price increases? CT Question

When the price of a good increases, the quantity demanded for that good decreases. Consumers only have so much money, so when they look to purchase goods and services, they want to purchase them at a reasonable price. Price changes act as an incentive in the marketplace, and an increase in price causes a decrease in quantity demanded. Quantity demanded refers to the willingness to buy a certain good at a specific price.

Describe how necessities v. luxuries affects elasticity

Whether a person considers a good to be a necessity or a luxury has a great impact on a person's elasticity of demand for that good.