Economics Ch. 4 Test

A decrease in the price of pizza would lead to what?

An increase in the quantity demanded.

The assumption that nothing other than the price of a good will change. Latin phrase for "all other things held constant."

Ceteris Paribus

What are the two types of related goods?

Complements and substitutes.

The law of demand is the result of two patterns of behavior that overlap. What are these two behavior patterns?

Substitution effect and income effect

Demonstrating Concept: 1. Minimum wage is raised to $8.00 per hour. 2. Price of CD players fall. 3. Powerful advertisements make CDs much more appealing. What would happen to the demand for CDs? Why?

The demand for CDs would increase. Reasons: 1. Rise in income enables consumers to buy more at all prices. 2. CD players and CDs are complementary goods. 3. Consumer tastes change, stimulated by advertising.

No matter how much money you make, what will strongly influence your decision to buy? *Ex: A clothing store holds a one-day half price sale on all clothing. Consumers react to the sale by buying more clothes than on a typical day.*

The price of a good.

What does substitution effect and income effect describe? *They are both factors that influence demand or consumer buying choices. Together they explain why an increase in price decreases the amount purchased.*

The two different ways that a consumer can change his or her spending patterns.

When does substitution effect occur? *Ex: Buying a bus ticket instead of an airline ticket when the price of airline tickets go up.*

When people buy a similar but cheaper product instead of a more costly product.

Consumers demand different amounts at every price, causing the demand curve to shift to the left or the right.

change in demand

A consumer's __________ affects his or her demand for most goods.

income

When the price goes ____ quantity demanded goes ____. (vice versa)

up; down OR down; up

The substitution effect can also apply to what? *Ex: If the price of airline tickets drop in price, airline tickets become cheaper compared to other alternatives. Consumers will now buy airline tickets instead of bus tickets therefore buying the item as a substitute for the bus tickets.*

A drop in prices.

_______________________ affect demand for certain goods when consumers expect prices to rise in the future, immediate demand will increase. If consumers expect prices to fall in the future immediate demand will decrease. *Ex: If you want to by a bike and the salesperson mentions that prices will go up in one week, you are more likely to buy the bike today because you expect the high price in the near future.*

Consumer expectation

What causes the demand curve to shift? *These changes can lead to a change in demand rather than a change in the quantity demanded.* *Ex: Ashley's town is hit by a heat wave, and Ashley no longer feels as hungry for pizza. She will demand fewer slices at every price. See Fig. 4.4 on pg. 92. On the left it shows her original demand curve and her new demand curve, adjusted for hot weather.*

Income, advertising, population, demographics, consumer expectation, complementary, substitutes, and consumer taste and preference.

Consumer tastes & advertising are related due to ________________ can affect consumer tastes by causing consumers to develop a taste for certain items, creating demand for goods that were not previously in demand. *Advertising plays an important role in leading a shift in the demand curve by helping to create fads and trends.*

advertising

When the price of movie tickets, shoes, or pizza increases, your limited __________ just won't buy as much as it did in the past. You are consuming LESS due to the rising prices. *Ex: Buying both a CD & DVD because the price of CDs went down.*

budget

A movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price. *Ex: In the graph of Ashley's demand for slices of pizza, an increase in the price from $2 per slice to $3 will make Ashley's quantity demanded fall from four slices to three slices per day. This movement along the curve is referred to as the decrease in the quantity demanded.*

change in quantity demand

Goods that are bought and used together. *If the prices of a product goes up, demand for its complement will go down. If the prices of a product goes down, demand for its complement will go up.* *Ex: Paint with paint brushes.* 1. If there is an increase in construction of houses, what happens to demand for paint? Shifts curve how? What is the complement for paint? What happens to demand for the complement? Shifts curve how? 2. If there is an decrease in construction of houses, what happens to demand for paint? Shifts curve how? What is the complement for paint? What happens to demand for the complement? Shifts curve how?

complements *Example* 1. Demand for paint would increase; shifting curve to the right; paint brushes; increases; to the right. 2. Demand for paint would decrease; shifting curve to the left; paint brushes; decreases; to the left.

Our expectations about the future can affect our _________ for certain goods today.

demand

The desire to own something, and the ability and willingness to buy (or pay) for a product. *To have demand for a good or service both of these conditions must be present.*

demand

A graphical representation of a demand schedule showing the quantity demanded at each & every price that might prevail in the market. *Demand curve always slopes downward and to the right.*

demand curve

A table that lists the quantity of a good a person will buy at various prices in a market.

demand schedule

Consumers with different _______________________________ may have different demands for goods. If businesses understand the demographics of their markets, they can adjust their products or advertising to better appeal to the demand of these markets.

demographic characteristics

The statistical characteristics of populations, such as age, race, gender, occupation, and income level. *Businesses use this data to identify who potential customers are, where they live, and how likely they are to purchase specific product. It also has a strong influence on the packaging, pricing, and advertising for a product.*

demographics

The change in consumption that results when a price increase causes real income to decline.

income effect

Goods whose demand falls as consumer income increases. *Ex: Cheap or store brand items like macaroni & cheese, generic cereals, and used cars.*

inferior goods

Concept that consumers will buy more of a good when its price is lower and less when its price is higher.

law of demand

The demand curve that shows quantities demanded by everyone who is interested in purchasing the product.

market demand curve

A table that lists the quantity of a good all consumers in a market will buy at various prices.

market demand schedule

To show how demand for a good will change at specific price points, economists use a _____________________________. This helps show how people will change their buying habits when prices change.

market demand schedule

An increase in your income from $50 per week to $75 per week will cause you to buy ______ of a normal good at every price level. *Ex: Expensive or name brand item like Nike or steak.*

more

Goods that consumers demand more of when their incomes increase (most items that we purchase).

normal goods

In change of demand, there is a change in one of the factors ______________________ that affects consumers decisions about purchasing goods causing shifts in the demand curve. *Ex: If a store owner notices that demand for all types of bread has been dropping steadily over the last year, which the price has changed very little, the owner may be seeing a change in demand due to a popular low-carbohydrate diet.*

other than price

Changes in the size of the ________________ will affect the demand for most products. *Ex: Growing population needs to be housed and fed. A rise in population will increase demand for houses, food, and other goods and services.

population

A demand curve is accurate only as long as there are no changes other than _______ that could affect the consumer's decision. Demand curve is accurate only as long as the ceteris paribus (all things other than price remains constant). *When the price changes, it moves along the curve to a different quantity demanded.*

price

An increase in demand shifts the curve to the ________, and a decrease in demand shifts the curve to the _________.

right; left

If you create a demand schedule for an individual and for a market for the same product, the prices of the good or service will what?

stay the same

Goods that are used in place of one another. *Ex: Steak and ground beef.* 1. If steak rises in price what might people substitute with? 2. What happens to demand of steak? 3. How does the curve shift? 4.What happens to demand of ground beef? 5. How does the curve shift?

substitutes *Example* 1. Ground beef 2. Demand of steak decreases. 3. The curve shifts to the left. 4. Demand of ground beef increases. 5. The curve shifts to the right.

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

substitution effect