CVHS - Economics - Chapter 4 Study Guide
substitute
A substitute is a good that can be used as an alternative to another good. Example: a substitute for Coke is Pepsi.
demand
Demand is the desire, ability and willingness to buy a product. Desire — you simply want it. Ability — you have the resources to obtain it (money). Willingness — you are willing to expend your resources to obtain it.
elasticity of demand (elasticity)
Shows how a change in quantity demanded RESPONDS to a change in price.
substitution effect
The substitution effect OR law of substitution: The law states that a change in price of a main good will affect the demand of substitutes. Everything is RELATIVE — the law looks at the relative prices of a good and other similar goods. An INCREASE in price of a main good will INCREASE the demand of substitutes, and vice versa. More people would want to buy the alternatives rather than the main product.
total revenue
The total money made from the goods sold by a company — or the price times quantity demanded. EQUATION: PRICE OF GOODS × QUANTITY OF GOODS DEMANDED
Milk is considered a __________ while filet mignon steak is considered a __________.
inelastic, elastic
In the U.S. most goods are allocated through a __________ system.
market economy
A shift in the demand curve occurs when forces other than _______ cause consumers to buy more or less of a good.
price
Total revenue is based on the following two factors
quantity of a good demanded, price of good
What are 4 factors that affect elasticity?
* whether the purchase can be postponed or avoided * substitutes and their availability * income, and how much income is needed to buy things * whether the good is a luxury or a necessity
unitary elastic (unit elastic)
A change in price causes a PROPORTIONAL change in quantity demanded. In the equation, the price is EQUAL to quantity demanded in terms of change in percent.
complement
A complement is a good that is related or purchased with another good. Example: computers and software are complementary goods. Example: Xbox and Xbox game releases are complementary goods.
demand curve
A demand curve is the GRAPH version of a demand schedule. It is a GRAPH of the specific quantities a person would buy at specific prices. Every point represents a quantity demanded at a price.
market demand schedule
A market demand schedule is a demand schedule, but it has the SUM of quantities demanded by EVERYONE in the market COMBINED.
normal good
A normal good is a decent quality, unique good that is sold by a "name brand" or widely known company.
Why do economists use percentage change to calculate elasticity?
A percentage is a way to generalize an increase or decrease in quantities, and thus percentages can be easily compared with other percentages.
Advertising is a factor that shifts the demand curve because
Advertising affects two of the factors in S.P.I.T.E that shift the demand curve. Advertising affects the tastes and preferences of consumers, for it may deem a product, service, or a way of doing things as the best or superior to anything else, which may bring consumers to adopt it and prefer it. Advertising may also affect consumers' expectations and future predictions, if an advertising supports or attacks the future success or price viability of a product.
inferior good
An inferior good is an off-brand, discount good that is designed to be a cheaper alternative or substitute to a normal good.
What do sellers do if they expect the price of goods they have for sale to increase dramatically in the near future?
If the demand of a market is inelastic, then sellers will HOLD OFF on SELLING until the prices of goods increase.
Demand for life-saving medicine is usually considered to be inelastic because
Medicine is extremely important, since it helps keep people healthy and alive. People will need to buy and use medicine without much regard to the price, since it is so important.
How is future prices related to current demand?
Remember as a part of SPITE, consumer's expectations and predictions about the prices in the future shifts the demand curve. So, if a consumer predicts that the price of a product will become cheaper later in the FUTURE, they will hold off on buying in the PRESENT. If a consumer is worried about losing their job in the FUTURE, they will hold off on buying a lot in the PRESENT.
demand schedule
Remember, in a market economy, individuals and companies act in their own best interests to answer the WHAT, HOW, and FOR WHOM questions. A demand schedule is a TABLE showing specific quantities a person would buy at specific prices. This depends on demand — their desire, ability, and willingness.
income effect
The income effect is a change in the consumer's real income due to a change in price. A consumer's "real income" is their buying power: it is how much they can buy with the money they have. If prices were cheaper, consumers would buy more (more buying power) — they feel richer. If prices were expensive, consumers would buy less (less power) — they feel poorer.
law of demand
The law of demand is the relationship between price and quantity demanded: Quantity demanded varies INVERSELY with price. When price increases, quantity demanded decreases. When price decreases, quantity demanded increases.
ceteris paribus
The phrase "ceteris paribus" is latin for "other things equal or held constant." This would be typically said or used with economic laws. Example: the law of demand shows the relationship of price and quantity demanded — WITH all other variables held constant.
elastic
There is a LARGER change in quantity demanded with a given change in price.
inelastic
There is a SMALLER change in quantity demanded with a given change in price.
Which item was once considered a luxury has now become a necessity in America?
Toilet paper became a necessity.
When the selling price of a good goes up, what is the relationship to the quantity supplied?
When the selling price of a good increases, the quantity supplied increases as well (this is NOT quantity DEMANDED). This is because producers are more willing to make more goods if they get a greater revenue and profit from it.