Chapter 4 Economics Test

Demand

the combination of desire, ability, & willingness to buy a product

microeconomics

parts of economics that studies small units, such as individuals and firms

market economy

economic system in which people and firms make all economic decisions

demand schedule

a table that lists how much of a product consumers will buy at possible times

demand curve

graph showing the quantity demanded at each and every price at a given time

law of demand

rule stating that consumers will buy more of a product at lower prices and less at higher prices

market demand curve

a curve that shows how much of a product all consumers will buy at all possible times

marginal utility

additional satisfaction or usefulness a consumer gets from having one more unit of a product

diminishing marginal utility

decrease in satisfaction or usefulness from having one more unit of the same product

The demand curve shows the demand schedule graphically, with a _________ slope.

downward

Slimmer Kids, Fatter Profits

Kraft launched Lunchables in 1988, but critics were soon to point out that these meals were very high in fat. The company decided to make a whole section of their business dedicated to making the Lunchables healthier. Since 2004, they have cut calories, fat and sodium considerably. The company has no choice but to do this because they do not want to be remembered for making kids fat. So far this strategy has worked, as Lunchables are still very profitable.

How do you react to a change in the price of an item? How does the illustrate the concept of demand?

If the price rises I usually buy a different item, but if the price lowers I will want it more. This illustrates the concept of demand because I would rather pay less for something.

How does the market demand curve reflect the law of demand?

The law of demand says a raise in price makes the quantity demand go down and a decrease in price makes the quantity demand goes up. This reflects the curve because as the price drops, the quantity of demand increases.

How does the principle of diminishing marginal utility explain the price we pay for another unit of a good or service?

The principle of diminishing marginal utility explains the slope of the demand curve because after the first purchase, people are not willing to pay as much for more items since they will not have as much satisfaction. This explains why we are not willing to pay as much money for a second unit as we were the first.

How might one business's decision to sell goods at a price lower than its competitors impact the economy?

This would impact the economy because it would force other businesses to lower their prices, which would allow more consumers to purchase the goods. This could help the economy boost.

Why is the law of demand an important rule of economics?

So that businesses can make their goods more available to consumers. If owners know that lowering the price will reap more profits, they will do this.

change in quantity demanded

movement along the demand curve showing that the amount someone is willing to purchase changes when the price changes

income effect

change in quantity demanded due to a change in price that alters a consumer's real purchasing power

substitution effect

change in quantity demanded due to a change in the relative price of a product

change in demand

shift of the demand curve when people buy different amounts at every price

substitutes

competing products that can be used in place of one another

complements

products that increase the use of other products

What is the difference between a change in quantity demanded and a change in demand?

A change in quantity demanded is movement along the demand curve showing that the amount someone is willing to purchase changes when the price changes. This is movement from point a to point b, represented graphically. A change in demand is a shift of the demand curve when people buy different amounts at every price. (movement of curve left to right)

The law of demand states that

more will be purchased at lower prices that at high ones

The demand curve is always

downward sloping

Buying only one drunk instead of two drinks at lunch time describes what concept?

diminishing marginal utility

Which of the following statements describes the demand curve?

it shows there is an inverse relationship between the price of an item and the quantity demanded

what is the main difference between the individual demand curve and the market demand curve ?

only the market demand curve shows demand for everyone in the market

which of the following would cause a change in the quantity demanded for a product?

decreasing the price of a product

how does the demand curve show an increase in demand?

curve shifts right

how does the change in the price of a good affect its complement?

an increase in a price of a good usually leads to a decrease in the demand for its complement

which of the following is an example of substitutes?

butter and margarine

a change in the numbers of consumers can cause

the market demand curve to shift

elasticity

a measure of responsiveness that shows how one variable responds to a change in another variable (how dependent variable responds to change in independent variable)

demand elasticity

the extent to which a change in price causes a change in the quantity demanded

elastic

type of elasticity where a change in price causes a relativity larger change in quantity demanded

inelastic-

type of elasticity where a change in price causes a relativity smaller change in quantity demanded

unit elastic

type of elasticity where a change in price causes a proportional change in quantity demanded

What happens to the total expenditures for a product with elastic demand when its price goes up?

The total expenditures go down, this is an inverse relationship.

Summarize the reading on pg 110 "The iPod"

- The iPod was more popular than other mp3 player because it was smaller and could hold mores songs.

- iTunes store was cheaper

- iPod mini was very small and could hold even more songs

- apple constantly updates to keep up with the market

what are the three questions to help determine elasticity?

can the purchase be delayed? are adequate substitutes available? does the purchase use a large portion of income?

total expenditures are determined by

multiplying the price of a product by the quantity demanded

the relationship between the change in price and total expenditures for an elastic demand curve is

inverse

if a consumer cannot postpone the purchase of a product, demand tends to be

inelastic

a company decreases the price of a gallon of milk by 10

% and the company's total revenue falls. what term describes this?

inelastic

which of the following is elastic demand?

purchasing fresh vegetables in summer