Chapter 4 - Consumer Demand

Question 1

What is demand?

Answer 1

The ABILITY and WILLINGNESS to buy specific quantities of a good at alternative prices in a given time period

Question 2

What is MARKET demand?

Answer 2

The TOTAL QUANTITIES of a good or service people are willing and able to buy at alternative prices in a given time period. it is the SUM of all individual demands

Question 3

What are the 2 determinants of demand?

Answer 3

1. Sociopsychiatric Explanation
2. Economic explanation

Question 4

Describe the “economic explanation” of demand

Answer 4

Willingness and ability to pay, market demand for a specific product is determined by:
Taste
Income
Expectations
Other goods
Number of consumers in the market

Question 5

What is the utility theory?

Answer 5

The more pleasure a product gives, the higher price buyers are willing to pay

Question 6

“Utility”

Answer 6

Satisfaction

Question 7

What is the definition of utility?

Answer 7

Pleasure or satisfaction obtained from a good or service

Question 8

What is marginal utility

Answer 8

Change in total utility obtained by consuming one additional (marginal) unit of a good or service

Question 9

What is total utility

Answer 9

Amount of satisfaction obtained from ENTIRE consumption of a product (sum of all marginal utilities)

Question 10

When determining what to buy for the highest utility possible, divide what by what to find ACTUAL marginal utility?

Answer 10

marginal utility/price

Question 11

As long as marginal utility is _______, total utility will increase

Answer 11

positive

Question 12

Total utility will only decrease when ..?

Answer 12

Marginal utility is a negative number

Question 13

What is the Law of diminishing marginal utility?

Answer 13

Marginal utility of a good declines as more of it is consumed in a given time period. only applies in a SHORT TIME PERIOD situtation

Question 14

What is on the x and y axis for the graph of marginal utility?

Answer 14

y axis: marginal utility
x axis: quantity

Question 15

What is on the x and y axis for the graph of total utility?

Answer 15

y axis: total utility
x axis: quantity

Question 16

Economists focus on the relationship between _____ and ______ to determine how much we are willing to buy

Answer 16

price and quantity

Question 17

What 2 things explain the downward slope of the demand curve?

Answer 17

1. The concept of marginal utility
2. relationship between price and quantitiy

Question 18

People are only willing to buy additional quantities of a good if…?

Answer 18

the price falls

Question 19

The higher the marginal utility, the _____ you are willing to pay

Answer 19

more

Question 20

What is the price elasticity of demand?

Answer 20

Method of measuring consumers’ responses to a change in price

Question 21

What is the formula for price elasticity?

Answer 21

percentage change in quantity demanded/percentage change in price

Question 22

A price elasticity value of 0.5 indicates that…?

Answer 22

Sales decline at half the rate of price increases

Question 23

What is elastic demand?

Answer 23

Quantity demanded is SENSITIVE to price

Question 24

When is demand considered elastic?

Answer 24

When E is greater than 1

Question 25

What is inelastic demand?

Answer 25

Quantity demanded is relatively insensitive to price

Question 26

When is demand considered inelastic?

Answer 26

E is less than 1

Question 27

What is unitary elastic demand?

Answer 27

As the price of the good changes, (increases/decreases), producer’s total revenue remains the same

Question 28

When is demand considered unitary elastic?

Answer 28

absolute value of E = 1

Question 29

Why can producers not charge the highest possible price?

Answer 29

the concept of price elasticity

Question 30

higher prices can ______ total sales revenue

Answer 30

reduce

Question 31

How to calculate total revenue?

Answer 31

Total revenue = price*quantity sold

Question 32

If demand is inelastic, price increase will cause total revenue to ______

Answer 32

increase

Question 33

If demand is unitary elastic, price increase/decrease will cause revenue to _____

Answer 33

remain the same

Question 34

If demand is elastic, price decrease will cause revenue to _______

Answer 34

increase

Question 35

What are the 3 determinants of price elasticity

Answer 35

1. Necessity or luxury (necessity = inelastic, luxury = elastic)
2. Availability of substitutes
   ex: other coffee besides starbucks
3. Price relative to income

Question 36

if PRICE and INCOME go up, what will happen to demand?

Answer 36

remain the same