Chapter+4+HW

Chapter 4.1 Notes __**Key Terms**__ Demand : the desire to own something and the ability to pay for it Law of Demand : consumers buy more of a good when its price decreases and less when its price increases Substitutional Effect : when consumers react to an increase in a good's price by consuming less of that good and more of other goods Income Effect : the change in consumption resulting from a change in real income Demand Schedule : a table that lists the quantity of a good a person will buy at each different price Market Demand Schedule : a table that lists the quantity of a good all consumers in a market will buy at each different price Demand Curve : a graphic representation of a demand schedule

__**Understanding Demand**__ - demand is the desire to own something and the ability to pay for it

__ **The Law of Demand** __ - when the price is higher, consumers will buy less of it; when a good's price is lower, consumers will buy more of it

__**The Substitution Effect**__ - if the price for one good rises a consumer is more willing to buy a substitution of the product at a lower price

__**The Income Effect**__ - when the price for goods increases a consumer's budget decreases because they are no longer able to afford the things they used to

__**A Demand Schedule**__ - price of an item affects the quantity demanded

**Understanding Demand** - to have demand for a good means that you must buy it at the specified price - you want it and you can afford it

**Market Demand Schedules** - shows the quantities demanded at each price by all of the customers in the market

__**The Demand Graph**__ - demand curve

**Reading a Demand Curve** - graph only shows relationship between the price of the good and the quantity

**Limits of a Demand Curve** - the market demand curve can be used to predict how people will change their buying habits when the price rises or falls - the market demand curve is only accurate for one very specific set of market conditions

Chapter 4.1 Assessment 1. Define and give an example of the income effect? - the change in consumption resulting from a change in real income ex: prices increase for a movie and someone doesn't buy it because it's over their budget 2. What are three characteristics of a demand curve? - graph only shows price and quantity - slopes down and the the right - predicts how people change their buying products 3. Explain why the law of demand can apply only in a free market economy? - not all the prices would be the same and if the things can be priced individually consumers will buy more of a product why the price is low

Chapter 4.2 Notes Key Terms Ceteris Paribus : a Latin phrase that means "all other things held constant" Normal Good : a good that consumersdemand more of then their incomes increase Inferior Good : a good that consumers demand less of when their incomes increase Complements : whoo good that are bought and used together Substitutes : goods used in place of one another

__**Changes in Demand**__ - demand curve is accurate as long as there are no changes (other than price) that could affect a consumer's decision - movement along th demand curve is reffered to as a decrese in the quantity demanded

__**What Causes a Shift**__ - not price

**Income** (normal/inferior goods)

**Consumer Expectations** (current demand for a good is related to it's expected future price)

**Population** (demand for houses/food/other goods nedded for a growing population)

**Consumer Tastes and Advertising** (ad campaigns)

__**Prices of Related Goods**__ - compliments/substitutes

Chapter 4.2 Assessment 1. What is an example of something you consider an inferior good? - cereal/used cars 2. What is one good that can be considered a complement for another? - ski boots/skis 3. What are two goods that can be considered substitutes? - snowboards/skis 4. How does the ceteris paribus assumption affect a demand curve? - the demand curve stays the same

Chapter 4.3 Notes Key Terms Elasticity of Demand: a measure of how consumers react to a change in price Inelastic: describes demand that is not very sensitive to a change in price Elastic: descrives demand that is very sensitive to a change in price Unitary Elastic: describes demand whose elasticity is exactly equal to 1 Total Revenue: tha total amount of money a firn receives by selling goods/services

Calculating Elasticity - law of demand implies that the result will always be negative

Price Range - demand for a good can be highly elastic at one price and inelastic at a different price

Values of Elasticity - when elasticity of demand is unitary the percentage change in quantity demanded is equal to the percentage in price

Factors Affecting Elasticity - availablility of substitutes - relative importance - necessities vs luxuries - change over time

Elasticity and Revenue - elasticity helps measure how consumers respond to price changes for different products - elasticity of demand determines how change in prices will affect a firm's total revenue or income

Computing a Firm's Total Revenue - total revenue is defined as the amount of money the company receives by selling its goods

Total Revenue and Elastic Demand - the law of demand tells us that an increase in price will decrease the quantity demanded