Chapter 3: Substitutes, Needs, Wants, and Demand

What is Price Elasticity of Demand (Ep)?

% change in quantity demanded (q) / % change in price (p)

Do acquisition costs other than monetary price affect quantity demanded or demand?

No to quantity demanded but yes to demand.

What goods are elastic?

Ones that have substitutes

What is Ep used for?

To measure the elasticity or responsiveness of a good in a market. [negative number but negative is ignored]

When are goods complements?

When a decrease in the price of one good results in the demand for the other shifting right or increasing.

When are goods substitutes?

When an increase in the price of one results in an increased demand for the other.

When are goods independent?

When they are not related at all.

Are there substitutes for everything?

Yes

What is a demand schedule?

a listing of money costs (prices) in dollars per unit and amounts in units per time that will be purchased at those prices.

What are acquisition costs?

costs to consume a certain good. Includes both monetary (price) and non-monetary sacrifices.

What are wants?

people's desires to have goods

What are two shifters that continually change?

population and inflation

What is demand?

the whole demand schedule or curve

What are goods?

things from which people derive satisfaction

What are substitutes?

things that fulfill the same basic role as the good

When do people start choosing alternatives?

when acquisition costs increase

What are needs?

Goods that people think they must absolutely have

What does elastic demand mean?

If the change in price results in a relatively large change in demand.

What does inelastic demand mean?

A change in price results in a small change in demand.

What is a non-monetary cost?

Any sacrifice other than money an individual has to make to get a unit of the good

What are some demand shifters?

Consumer income, number of consumers, preferences, price of related goods

How do people choose between goods and their substitutes?

By weighing costs and benefits of alternatives

What direction are demand curves?

Downward sloping to the right

Trend of EP in terms of price and revenue:

Ep < 1: price increase -> revenue increase, vice versa Ep > 1: price increase -> revenue decrease vice versa Ep = 1: any price change -> no change in revenue

What is the classification of Goods by Ep

Ep > 1 then elastic. Ep = 1 then unit elastic. Ep < 1 then inelastic.

How are price and quantity demanded related?

Inversely. As one increases the other will decrease.

What is the basis of demand analysis?

Law of Demand

Are goods free?

Most are not. They can only be obtained by sacrificing something else that is desirable.

What is the aggregate demand schedule?

The demand schedule from multiple sources.

What is a demand curve?

The line graph of a demand schedule

What trend is seen in goods and the amount of substitutes?

The more narrowly a good is defined, the more substitutes that will exist, and the more price elastic the demand for the good.

What is the Law of Demand?

The quantity demanded will decrease as the money price increases, and increase as the money price decreases. In other words, the demand curve is downward sloping to the right.

What are some other factors that affect demand?

income (of consumers), population (number of consumers), preferences, and price of related goods.

What type of goods are those that take up small amounts of budgets?

inelastic demand

What is price?

monetary cost of a good

What is a monetary cost (price)?

the amount of money an individual must pay out of pocket to get a unit of the good.

What is quantity demanded?

the amount that people are willing to purchase at some price

What is inflation?

the changing value of money