4. Individual and Market Demands

Question 1

Price Consumption Curve (PCC)

Answer 1

For goods is the set of optimal bundles traced on an indifference map and X varies Y is constant

Question 2

How do you get a demand schedule?

Answer 2

Fro the consumption curve

Question 3

What does a demand curve infer?

Answer 3

Tells the quantities the consumer will buy at various prices

Question 4

What is the substitution effect?

Answer 4

The total effect of a price change. substitutes that might be more desirable

Question 5

What is the income effect?

Answer 5

Total effect of price change that results from an associated change in purchasing power

Question 6

What is total effect?

Answer 6

Sum of substitution and income effects

Question 7

What happens to the total effect when it is an inferior good?

Answer 7

Increase in price

Reduction in quantity

Question 8

What happens with the substitution effect?

Answer 8

When prices go up (down) quantity demanded goes down (up)

Question 9

What happens to the income effect with a normal and inferior good?

Answer 9

When the price goes up,
Normal good: quantity demanded goes down (up_
Inferiror good: quantity demanded goes up (down)

Question 10

What is a giffen good?

Answer 10

one for which the quantity demanded rises as its price rises

Must be an inferior good

Question 11

What is an example of an griffen good?

Answer 11

Potato famine

Question 12

What is an engel curve?

Answer 12

Curve that plots the relationship between quantity of X consumer and income

Question 13

What is a market demand curve?

Answer 13

Horizontal summation of individual demand curves

Question 14

Price elasticity of demand

Answer 14

The percentage change in the quantity of a good demanded that results froma 1 percent change in tis price

Question 15

What is the price elasticity is there is a 1% rise in the price of shelter which causes a 2% reduction in the quantity of shelter?

Answer 15

-2

Question 16

What arehe 3 categories of price elasticity and their categories?

Answer 16

elastic -1

Unit elastic =-1

Question 17

What is the equation for elasticity?

Answer 17

Ɛ=ΔQ/ΔP*P/Q

Question 18

What is the unit of elasticity?

Answer 18

No unit

Question 19

What is the point slope method of determining elasticity?

Answer 19

Ɛ=(P/Q)*(1/slope)

Question 20

What happens to the demand and total expenditure when the change in price is small?

Answer 20

Total expenditure will move if we know the initial price elasticity demand

Question 21

What happens with a price reduction and total revenue?

Answer 21

Will increase total revenue if absolute value of price easticity is greater than 1

Question 22

What are substitution possibilites

Answer 22

Abs value of the price elasticity will rise with the availabiity of attractive substitutes

Question 23

What is budget share?

Answer 23

The smaller the share of total expenditure accounted for by a good, less elastic demand will be

Question 24

Direction of income effect?

Answer 24

Normal good will have higher price elasticity than an inferior good

Question 25

Time’s effect on demand?

Answer 25

Demand for a good will be more responsive to price in the long run than in the short run

Question 26

What is the equation for the income elasticity of demand?

Answer 26

η=ΔQ/ΔY*Y/Q

Question 27

What are the characteristics of income elasticity of demand?

Answer 27

If stbale engle curve, we can define its income of elasticity of demand, the percentage change in the quantity of a good demanded that results from a 1 percent change in income

Question 28

What is the elasticity of a necessity good?

Answer 28

0-1

Question 29

What is the elasticity of a luxury good?

Answer 29

> 1

Question 30

What is the elasticity of a inferior good?

Answer 30

<0

Question 31

What is the cross price elasticities of demand?

Answer 31

The percentage change in quantity of one good demanded that results from a 1% change in price of other good

Question 32

What is the equationfor a cross price elasticities of demand?

Answer 32

Ɛ=ΔQx/ΔPz*Pz/Qx

Question 33

What is the elasticity of a complement good?

Answer 33

Negative

Question 34

What is the elasticity of a substitute good?

Answer 34

positive

Question 35

When elasticity is >1 ?

Answer 35

Price reduction increase total expenditure

A Price increase reduces expenditure

Question 36

When the elasticity is 1?

Answer 36

Total expenditure is at a maximum

Question 37

When the elasticity is <1?

Answer 37

A price redcution reduce total expenditure

A price increase increases it