What’s Happening with Demand Chapter Four Test Review

Willingness and ability to buy at a given price Demand

Caused by a price change Movement along a stable demand curve Caused by a price change Change in Quantity Demanded

When the price of a product increases I buy more quantity When the price of a product increases I buy more quantity. When the price rises I buy less quantity Law of Demand

1. Income Effect 2. Substitution Effect 3. Diminishing Marginal What are the three reasons for the L law of demand? 1. Income Effect 2. Substitution Effect 3. Diminishing Marginal Utiltiy.

Income Effect The portion of a change in quantity Demanded that is caused by a of a product changes. change in consumer’s income when the price Income Effect

Subsitution Effect The portion of a change in quantity demanded that is caused by a change in price that makes other products less costly. Subsitution Effect

Diminishing Marginal Utility Mmmm. Sushi First one tastes best Less usefulness or satisfaction as I consume more and more. Diminishing Marginal Utility

Shown by a shift of the entire demand curve Consumer demand for different accounts at every price that make the demand curve shift left of right. Shown by a shift of the entire demand curve Change in Demand

TRIPE or factors that cause a Change in Demand Tastes and Preferences, Related Goods, Income, population, and expectations Shifts the entire demand curve TRIPE or factors that cause a Change in Demand

Increase in Demand P S p1 p D1 D Q q q1 D  .: P ↑ & Q ↑

Decrease in Demand P S p p1 D D1 Q q1 q D  .: P↓ & Q↓

The additional satisfaction from consuming one more unit of a product. Marginal Utility

Peanut Butter and Jelly Goods that “go together.” Products that increase the use of other products so that an increase in the price of one decreases the demand for the other Complements

Substitutes Apples and Pears Competing products that increase that can be used in place of each other. Products related to each other so that an increase in the price of one reduces the demand for the other. Substitutes

When things are expensive money buys less When things are cheap money buys more Income Effect

When demand increases: The demand curve shifts_____. rightward Equilibrium price and quantity ______ increase

Increase in Demand P S p1 p D1 D Q q q1 D  .: P ↑ & Q ↑

When demand decreases: The demand curve shifts_____. leftward Equilibrium price and quantity ______ decrease

Decrease in Demand P S p p1 D D1 Q q1 q D  .: P↓ & Q↓

Measure of responsiveness that tells us how a dependent variable, such as quantity, responds to a change in an independent variable, such as price. Elasticity

Elasticity where a change in the independent variable (usually price) generates a proportional change dependent variable (quantity demanded or supplied).   Unit Elastic

Type of elasticity where the percentage change in an independent variable (usually price) results in a larger change in the dependent variable (usually quantity demanded or supplied). Elastic

Type of elasticity where the percentage change in an independent variable (usually price) generates a causes a less than proportionate change in the dependent variable (quantity demanded or supplied) Inelastic

The three factors that determine whether a product’s demand is elastic or inelastic. a) Are their close substitutes available. If yes then elastic. If no then inelastic. b) How important it is to your household budget. If it is expensive, then it is elastic. If it is cheap, then it is inelastic. 4) The period of time involved. If its short-term, people tend to be inelastic. Over time they adjust and can be elastic.

Branch of economic theory that deals with behavior and decision making by small units such as individuals and firms. Microeconomics