Chapter 5

Question 0

Law of demand

Answer 0

Inverse relationship between p and q demanded

Question 1

Demand

Answer 1

Different quantities that people are willing and able to buy at different prices in given period of time

Question 2

Three reasons why law of demand works

Answer 2

Substitution effect
Income effect
Decreasing marginal utility

Question 3

Substitute good

Answer 3

Goods which as a result of changed conditions may replace each other in use or consumption

Question 4

Income effect

Answer 4

Changes in price affects purchasing power (real income)

Question 5

Law of diminishing marginal utility

Answer 5

First unit if consumption of a good or service yields more utility than the second

Question 6

Marginal utility

Answer 6

Satisfaction you derive from an additional unit of a product

Question 7

Five shifters of demand

Answer 7

1. Consumer income
2. Tastes and preferences
3. Expectations
4. Price of related goods(substitutes/compliments)
5. Population size and composition

Question 8

Substitutes

Answer 8

Products that can be used in place of each other

Question 9

Compliments

Answer 9

Goods used in combination with other goods

Question 10

About demand graph

Answer 10

• increase in demand: curve shifts to the right

* decreases in demand: curve shifts to the left

Question 11

Elasticity of demand

Answer 11

Measures how responsive quantity demanded is to price change

Question 12

Determinants of elasticity

Answer 12

• Availability of substitutes
• Share of consumer’s budget spent on the good
• time

Question 13

Supply

Answer 13

Different quantities that firms are willing and able to produce at different prices

Question 14

Law of supply

Answer 14

Direct relationship between p and q supplied

Question 15

What supply and demand has to do with?

Answer 15

Demand has to do with consumers (demanders)

Supply has to do with producers (suppliers)

Question 16

2 reasons for law of supply

Answer 16

• Price as signal (for producers)

* ability to produce (higher prices make producers more able to increase quantity supplied)

Question 17

Six shifters of supply

Answer 17

1. Production costs
2. Technological advances
3. Price of related goods
4. Firms’ expectation about future prices
5. Number of suppliers
6. Taxes and subsidies

Question 18

About supply graph

Answer 18

• increase in supply: curve shifts to the right

* decrease in supply: curve shifts to the left

Question 19

Elasticity of supply

Answer 19

Measures how responsive producers are to changes in price

Question 20

Things to consider with supply elasticity

Answer 20

1. Cost of production

2. Length of adjustment period