More of Demand

Question 1

Exogenous Parameters/Variables

Answer 1

Independent variable, taken from outside model

Question 2

Endogenous Parameters/Variables

Answer 2

Dependant variables, explained by model

Question 3

Shifts in Demand VS Changes in Quantity Demanded

Answer 3

Changes in demand : the entire demand curve shifts either left or right.

A change in quantity demanded : refers to a movement along the demand curve, which is caused only by a change in price

Question 4

Changes in Tastes

Answer 4

A good for which consumers’ tastes and preferences are greater, its demand would be large and its demand curve will therefore lie at a higher level. People’s tastes and preferences for various goods often change and as a result, there is a change in demand for them.

Question 5

Normal Goods

Answer 5

Normal goods are those goods for which the demand rises as consumer income rises.

Question 6

Inferior Goods

Answer 6

An inferior good is a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases)

Question 7

Substitute Goods

Answer 7

Refers to the goods which can be used in place of one another to satisfy a particular want.

Question 8

Complimentary Goods

Answer 8

Complementary Goods refer to those goods which are consumed together to satisfy a particular want.

Question 9

Own-Price Elasticity

Answer 9

Price Elasticity of Demand compares the change in consumption after a change in the price (of ONE good or service).

[(QN - QI) / (QN + QI) / 2) ] / [(PN - PI) / (PN + PI) / 2]

Question 10

Point Elasticity

Answer 10

Point Elasticity measures elasticity responsiveness at a finite point of the demand curve and how the change in price affects the demand.

[(Qs2 – Qs1)/Qs1] / [(P2 – P1)/P1]

Question 11

Arc Elasticity

Answer 11

Arc Elasticity measures elasticity at the midpoint (between a pair of two points) on the demand curve.

Midpoint Qd = (Qd1 + Qd2) / 2
Midpoint Price = (P1 + P2) / 2

Question 12

Income Elasticity

Answer 12

Income elasticity is the change in the demand of a product in response to the change in a consumer’s income.

% change in QD / % change in income

Question 13

Cross-Price Elasticity

Answer 13

Cross elasticity of demand evaluates the relationship between two products when the price in one of them changes.

(XED) = (∆Q1/Q2 / (∆P1/P2)

Question 14

Elastic Demand

Answer 14

Greater than 1

Question 15

Inelastic Demand

Answer 15

Less than 1

Question 16

Total Revenue

Answer 16

TR = Quantity * Price per Unit

Question 17

Total Expenditure

Answer 17

Total expenditure is the amount of money that is spent on goods or services.

TE = Quantity * Price per Unit

Question 18

Second Law of Demand

Answer 18

The second law of demand states that, as the price of a good or service increases, the quantity demanded for that good or service will decrease, ceteris paribus.

This is also known as the law of diminishing marginal utility.

Question 19

Infinite elasticity results in

Answer 19

Horizontal line

Question 20

0 Elasticity results in

Answer 20

Vertical line

Question 21

Income elasticity of a normal good

Answer 21

• Greater than 0
• Positive

Question 22

Income elasticity of inferior good

Answer 22

• Less than 0
• Negative

Question 23

Cross-price elasticity of a substitute

Answer 23

• Greater than 0
• Positive

Question 24

Luxury goods

Answer 24

High income elasticity

Question 25

Necessities

Answer 25

Low income elasticity