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1

What is a demand schedule?

2

According to the Law of Demand, what sort of relationship exists between the price of a good and the quantity demanded for that good?

An inverse relationship: as the price of a good goes up, buyers demand less of that good.

3

Draw a basic example of a demand curve.

4

Write an example of a demand equation.

P = 10 - 2Q

In this example, the intercept value is 10 and the slope of the demand curve is -2.  In order to satisfy the law of demand, the slope of the demand equation must be negative so that there is an invers relationship between the price and quantity demanded.

5

According to the Law of Demand, the slope of the demand equation be? (negative or positive?) And why?

It must be negative so that there is an inverse relationship between the price and quantity demanded.

6

In the Demand Equation, P = 10 - 2Q, what do both variables represent?

P denotes the price of the good. Q denotes the quantity of the good demanded.

7

In the Demand Equation, P = 10 - 2Q, identify the slop and the intercept value where quantity demanded is zero.

The intercept value is 10 and the slope is -2.

8

How is a change in the quantity demanded represented on the demand curve? and what is it?

It is a movement along the demand curve due to a change in the price of the good being demanded.

9

How is Change in Demand represented on the demand curve?

It is represented by a shift OF the demand curve, and not a shift ON the demand curve.

10

List the reasons for a change in the quantity demanded of a good.

There is only ONE reason for a change in the quantity demanded of good X: A change in the price of good X.

11

List the most common reasons for a change in the demand for good X.

1. Changes in the price of related goods. The demand for good X may be changed by increases of decreases in the prices of other related goods. 2. Changes in income. Typically, as incomes rise, the demand for a good will usually increase at all prices and the demand curve will shift to the right.

12

Related goods are divided into two categories. Name and define both.

These related goods are usually divided into two categories called substitutes and complements. A substitute for good X is any good Y that satisfies most of the same needs as good X. (for example margarine for butter). A complement to good X is any good that is consumed in some proportion to good X. When two goods are complements, then as the price of the complementary good Y rises, the demand for good X decreases and the demand curve for good X shifts to the Left. Conversely, as the price of the complementary good Y falls, the demand for X increases and the demand curve for good X shifts to the right

13

Define normal goods

goods for which changes in demand vary directly with changes in income.

14

Define inferior goods (as an economic term)

Goods for which an increase in income leads to a decrease in demand and a decrease in income leaders to an increase in demand. For example, meat and potatoes, as income increases demand for the cheaper food, potatoes, decreases and increases for the more expensive product and desirable product, meat.

15

Explain the implications of changes in preferences (with relation to the demand curve).

As peoples' preferences for goods and services change over time, the demand curve for these goods and services will also shift. For example, as the price of gasoline has risen, automobile buyers have demanded more fuel-efficient, "economy" cars and few gas-guzzling, "luxury" cars. This change in preferences could be illustrated by a shift to the right in the demand curve for economy cars and a shift to the left in demand curve for luxury cars.

16

Explain the implications of changes in expectations (with relation to the demand curve).

Demand curves may also be shifted by changes in expectations. For example, if buyers expect that they will have a job for many years to come, they will be more willing to purchase goods such as cars and homes that require payments over a long period of time, and therefore, the demand curves for these goods will shift to the right. If buyers fear losing their jobs, perhaps because of a recessionary economic climate, they will demand fewer goods requiring long-term payments and will therefore course the demand curves for these goods to shift to the left.

17

How can both the buyers demand and the sellers supply of goods be represented.

1. Supply/demand schedule 2. Supply/demand curve 3. Algebraically

18

According to the law of supply, a direct relationship existed between which two variables?

The price of the good and the quantity supplied of that good. As the price of a good increases, sellers are willing to supply more of that good.

19

Write the algebraic representation of the supply curve.

P = (1/2) Q

Which has a postive slope of 1/2, since the law of supply is also reflected in the upward-sloping supply curve of the graph below.

20

How is a change in the quantity supplied represented on the supply curve?

A change in the quantity supplied is a movement along the supply curve due to a change in the price of the good supplied.

21

How is a change in the supply represented on the supply curve?

A change in the supply, like a change in demand, is represented by a shift in the supply curve.

22

List the common reasons for a change in supply:

A change in supply is not caused by a change in the price of the good being supplied; that would induce a change in the quantity demanded and a movement along the supply curve. 1. Changes in the prices of other goods. Suppliers are frequently able to switch their production processes from one type of good to another. Farmers, for example, might decide to grow less wheat and more corn on the same land if the price of corn rises relative to the price of wheat. In this case, the supply curve for what would shift to the left, as a consequence of the higher price for corn. 2. Changes in the prices of inputs. The prices of the raw materials or inputs used to produce a good also cause the supply curve to shift. An increase in the prices of a good's inputs will raise cost to suppliers and cause suppliers to supply less of that good at all prices. Therefore, an increase int he prices of a good's inputs leads to a leftward shift of the supply curve for that good. 3. Changes in technology. Advances in technology often have the effect of lowering the costs of production, allowing suppliers to supply more goods at all prices.

23

What does it mean when the market for a good is said to be in equilibrium?

It means that the demand for good X equals the supply for good X.

24

Define equilibrium quantity.

That quantity for which the quantity demanded of good X exactly equals the quantity supplied of good X.

25

Define equilibrium price.

That price per unit of good X that allows the marked to "clear;" that is, the price for which the quantity demanded of good X exactly equals the quantity supplied of good X.

26

Define Equilibrium analysis.

The determination of equilibrium quantity and price, which can be achieved in two different ways: simultaneously solving the algebraic equations for demand and supply or by combining the demand and supply curves in a single graph and determining the equilibrium price and quantity graphically.

 

Example:

 

Demand equation P = 10 - 2Q

Supply equation P = (1/2) Q

Rewrite one equation and substitute

  • Q = 2P -->
  • P = 10 - 2(2P) -->
  • P = 10 - 4P -->
  • 5P = 10 -->
  • P = 2

The equilibrium price of good X is found to be $2.  Substitute:

  • Q=2(2) -->
  • Q=4

The equilibrium quantity is found to be 4 unites of good X.

27

Define the elasticity of demand or supply

The responsiveness of demand or supply to changes in prices or incomes.

28

Provide the formulas for the price elasticity of demand and supply.

  1. Demand: Price elasticity of demand = percentage change in quantity demanded / percentage change in price.
  2. Supply: Price elasticity of supply = percentage change in quantity supplied / percentage change in price.

29

True or False: If the percentage change in quantity demanded is greater than the percentage change in price, demand is said to be price elastic, or very responsive to price changes

True The price elasticity of demand or supply will differ among goods. fore example, consider a 50 % increase in the price of two goods: Candy bars and prescription meds. While the demand for both candy bars and prescription medicines should decline in response to the price increases, the percentage change in the quantity demanded of candy bars is likely to be much greater than the percentage change in the quantity demanded of prescription medicines because candy bars are less of a necessity than prescription meds. You could summarize this finding by stating that the demand for candy bars is more price elastic than the demand for prescription medicines. Alternatively, you might state that the demand for prescription meds is more price inelastic than the demand for candy bars.

30

What does it mean if the percentage change in quantity demanded is less than the percentage change in price?

Then demand is said to be price inelastic, or not very responsive to price changes.

31

Provide the formula for income elasticity of demand.

Income elasticity of demand = percentage change in quantity demanded / percentage change in income

32

What does it mean if the percentage change in the quantity demanded is greater than the percentage change in income?

Demand is said to be income elastic, or very responsive to changes in demanders' incomes.

33

Define the cross-price elasticity of demand.

The ratio of the percentage change in the quantity demanded of some good X to a percentage change in the price of some other good Y.

34

Provide the formula for the cross-price elasticity of demand.

Cross-price elasticity of demand = percentage change in quantity demanded of good X / percentage change in price of some other good Y

35

If the cross-price elasticity of demand is positive, the goods X and Y must be:

Substitues

36

If the cross-price elasticity of demand is negative, the goods X and Y must be:

Complements.

37

Draw the perfectly price elastic and perfectly price inelastic demand and supply curves.

Graphic

38

Provide a graph to illustrate changes in equilibrium.