What’s Happening with Demand Chapter Four Test Review

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

Income Effect Substitution Effect Diminishing Marginal Utility What are the three reasons for the L law of demand? Income Effect Substitution Effect Diminishing Marginal Utility

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. c) The period of time involved. If its short-term, people tend to be inelastic. Over time they adjust and can be elastic.

Diminishing Marginal Utility People get less usefulness or satisfaction as they consume more and more of a product. Diminishing Marginal Utility

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

Change in Quantity Demanded Movement along a stable demand curve showing that a different quantity is purchases in response to a change in price of that product. Change in Quantity Demanded

Willingness and ability to buy at a given price Demand

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. Right for an increase and left for a decrease. 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

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

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

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

When the price of a product decreases I buy more quantity When the price of a product decreases I buy more quantity. When the price rises I buy less quantity. An inverse relationship. Law of Demand

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

Income Effect The portion of a change in quantity demanded that is caused by a price change. This has nothing to do with one’s pay or income. Income Effect

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↓

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↓