Ch. 4 Demand
identify the determinants that create changes in demand and that can cause a shift in the demand curve
Income, consumer expectations, population and consumer tastes and advertising can cause a shift in the demand curve
explain how the substitution effect and the income effect influence decisions
The substitution effect and the income effect cause consumers to buy less of a good when the price is more expensive. The income effect leads consumers to spend less on their goods in order to afford the more expensive good, while the substitution effect encourages consumers to replace the expensive good with other, less expensive substitutes.
The substitution effect occurs when consumers react to an _______________ by consuming less of that good and more of other goods.
increasing in price of one good
Demand for a good that consumers will continue to buy despite a price increase is _________.
inelastic
The ______________ states that consumers buy more of a good when its price decreases and less when its price increases.
law of demand
A company's __________ is the total amount of money the company receives from selling its goods or services.
total revenue
The elasticity of demand determines how a change in prices will affect a firm's ____________ or __________.
total revenue; income
explain how the change in the price of one good can affect demand for a related good
If a good is a complement to another good and one of the good's price increase, it will cause people to buy fewer of both products because they are bought and used together. If a good is a substitute for another good and the price increases on one good, the other good will be bought more.
Another factor determining elasticity of demand is how much of your budget you spend on the good.
relative importance
If demand is elastic, a _________ leads to a relatively ____________________.
small change in price; large change in the quantity demanded
These two effects describe different ways that a consumer can change his or her _____________ for other goods.
spending patterns
______________ are goods used in place of one another.
substitutes
The law of demand is the result of two separate behavior patterns that overlap, the ___________ and the ___________.
substitution effect; income effect
formula used to find the % change in quantity demanded or price:
% change= (original number - new number/ original number) x 100
explain how firms use elasticity and revenue to make decisions
Elasticity helps us measure how consumers respond to price changes for different products and the elasticity of demand determines how a change in prices will affect a firm's total revenue or income.
explain the difference between a change in quantity demanded and a shift in the demand curve
When the price changes, we move along the curve to a different quantity demanded. A shift in the demand curve means that at every price, consumers buy a different quantity than before.
If there are few substitutes for a good, then demand will not likely decrease as price increases. The opposite is also usually true.
availability of substitutes
identify the factors that affect elasticity of demand
availability of substitutes, relative importance, necessities versus luxuries, and the change over time are factors that affect elasticity of demand
Firms need to be aware of the ____________ for the good or service they are providing.
change in prices
The demand curve for one good can be affected by a ________________ for another good.
change in the demand
Demand sometimes becomes more elastic over time because people can eventually find substitutes.
change over time
___________ are two goods that are bought and used together.
complements
Whether or not we expect a good to increase or decrease in price in the future greatly affects our demand for that good today.
consumer expectations
Advertising plays an important role in many trends and therefore influences demand.
consumer tastes and advertising
If demand is inelastic, consumers are not very responsive to changes in price. A __________ will lead to only a ___________________, or perhaps _________ at all.
decrease in price; small change in quantity demanded; no change
A ____________ is a geographical representation of a demand schedule.
demand curve
A _____________ is a table that lists the quantity of a good a person will buy at each different price.
demand schedule
Demand for a good that is very sensitive to changes in price is ________.
elastic
If a good has an ________ demand, raising prices may actually decrease the firm's total revenue.
elastic
__________________ is a measure of how consumers react to a change in price.
elasticity of demand
elasticity is determined by using the following formula:
elasticity= % change in quantity demand/ % change in price
Changes in consumers incomes affect demand. A normal good is a good that consumers demand more of when their incomes increase. An inferior good is a good that consumers demand less of when their income increases.
income
A ____________ is a table that lists the quantity of a good all consumers in a market will buy at each different price.
market demand schedule
Whether a person considers a good to be a necessity or a luxury has a great impact on the good's elasticity of demand for that person.
necessities versus luxuries
When reading a demand curve, assume all _________, such as income, are held _________.
other factors; constant
Changes in the size of the population also affects the demand for most products.
population
The income effect happens when a person changes his or her consumption of goods and services as a result of a ______________.
price increase
