ECONOMICS
Demand - Ch 4
1. Define and give an example of the income effect.
It occurs when a consumer responds to a price increase by spending more on that good. If you always buy a
particular brand of favorite potato chips, and the price goes up, you may still buy it, but you may also cut
down on the consumption because your money does not go so far.
2. What are the three characteristics of a demand curve?
1) The curve shows the relationship between the price of the good and the quantity a person will purchase
2) The curve assumes that other factors remain constant
3) The curve slopes downward to the right
.
3. What is an inferior good?
An increase in income causes the demand of an inferior good to fall. For example, you would buy less
generic and cheap food when you could afford something better.
4. What is an example of a good that is a complement for another?
Two goods that are bought and used together, like a bicycle and a helmet.
5. What is an example of two goods that can be substitutes?
Goods that are used in place of one another. For example: you need to buy a mode of transportation so you
can either buy a car or motorcycle . . not both.
6. How does the ceteris paribus assumption affect a demand curve?
It allows the demand curve to exist as a constant without variables other than price affecting it.
7.
What is elasticity of demand?
It measures how drastically buyers will increase their demand for a good when the price rises or falls.
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8. What is the difference between elastic and inelastic demand?
SEE VIDEO ON ELASTICITY
Elastic:
I love peanuts. It costs $.50 per bag. I eat peanuts all day long every day. YEEHAWWW
Peanut bags now cost $10 per bag. I love peanuts. I still buy peanuts, but just one bag a month. NUTS!
Inelasticity
I love peanuts and walnuts. Peanuts cost $.50 per bag. I eat peanuts all day long every day.
Peanut bags now cost $.51 per bag. I ditch the peanuts and eat walnuts every day all day long. The
demand for peanuts is inelastic. Besides doesn’t a peanut kind of look like a walnut?
9. How do we calculate total revenue?
It is determined by multiplying the quantity of goods sold by the price charged.
Week 4 of 10.
The 3rd quiz towards your midterm.
Demand - Ch 4
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