Download Demand review answers

Bryant
Economics
I. Demand and Quantity Demanded
DEMAND REVIEW
Plot the demand schedule on the demand graph.
Demand schedule for Coke
Price
Quantity
$
$
$
$
$
.25
.30
.40
.45
.50
Price
500
400
300
200
100
Quantity
1. DEMAND is the quantities of a good or service that consumers are willing and able to buy at
various prices during a given time period.
2. QUANTITY DEMANDED is the quantity of a good or service that will be demanded at a
particular price.
3. The DEMAND SCHEDULE is a listing of the quantities demanded at each price and from this
the DEMAND CURVE can be plotted.
4. Notice that there is a INVERSE relationship between price and quantity demanded.
5. The idea that as price increases and quantity demanded decreases, and vise versa, is known as
the LAW OF DEMAND. Because of this relationship the demand curve is said to be sloping
DOWN ward from left to right.
6. There are three reasons why the law of demand is true. One, the INCOME EFFECT says that
the buyer’s income is limited so if they are to buy more, the price must be lowered and as the
price of goods and services rise, buyers cannot buy as much.
7. Two, the SUBSITUTION EFFECT says that at higher prices consumers will substitute other
products for the one in question and; therefore, the quantity demanded will decline for that
product (and vise versa).
8. Three, LAW OF DIMINISHING MARGINAL UTILITY says that as buyers consume a
product the usefulness/satisfaction derived from each additional unit declines. This is
illustrated by the example of drinking sodas. The most satisfaction comes from the first one
you drink and after that their value or usefulness diminishes. This explains why lower prices
are needed if the buyer is to be enticed into buying more units of the product.
9. Quantity demanded differs from demand, in that, QD is changed by PRICE and is illustrated
by a MOVEMENT ALONG the demand curve. Quantity demanded is dealing with one
particular price and quantity. Demand is dealing with all the entire relationship of price and
quantity for a product. It is looking at the all prices at all quantities.
10. The two most important provisions contained in the definition of demand are WILLING AND
ABLE TO BUY and AT VARIOUS PRICES
11. The given time period means that all things are held constant (CETERIS PARIBUS) for the
demand graph. However, over time existing conditions might change.
12. The NON-PRICE DETERMINANTS of DEMAND illustrate the changes that might occur.
The non-price determinants of demand cause the demand curve to shift to the RIGHT for an
increase and to the left for a DECREASE.
Use the graph to answer the following questions.
13. Notice that in the graph that at each price the
quantity increased for corn when the graph shifted
4
to the RIGHT.
14. This illustrates an increase in demand. It occurred
3
because of one of the non-price determinants of
demand changed. For example in D2 the situation
2
might be that consumers now feel corn is healthy
for you. This determinant is TASTE and
1
PREFERENCES. Now at each and every price the
50
60
70
80
quantity has increased. There was a new time
period in which ceteris paribus assumptions were
Bushels of corn
lifted, and D1 became D2.
15. If we assume that all things remain the same and change only the price of the product, then
we will have a change in QUANTITY DEMANDED.
16. True, if we lower the price, then the quantity demanded will increase. But rather than
shifting the curve like we did for a CHANGE in DEAMND, we show this change in QUANTITY
DEMANDED as a MOVEMENT ALONG the demand curve.
17. Illustrate a change an increase quantity demand on the graph below and a increase in demand.
Price
5
Price
Price
Quantity
Quantity
18. Fill in the blanks in the following statements. These statements help us to remember the
differences between a change in demand and a change in quantity demanded.
Price
QUANTITY DEMANDED
Moves the point
along the curve
NON-PRCE DETERMIANTS
__________ ___________
Demand
SHIFT ON THE CURVE
Elasticity of Demand
19. The ELASTICITY of demand is defined as the degree of responsiveness of a change in
quantity demanded to a change in PRICE.
20. If the percentage change in QD is GREATER than the percentage change in price, then
demand is said to be ELASTIC.
21. But, if the percentage change in quantity demand is LESS than the change in price, then
demand is said to be INELASTIC.
22. Products which have INELASTIC demand may have one of the following characteristics:
necessity, few good substitutes, or takes a small portion of income.
23. Products that are ELASTIC in demand may have these characteristics: a luxury, many good
substitutes, or large portion of income is used in its purchase.
Decide whether the demand for the following products is elastic/inelastic using the total revenue
test:
24. The price of product X is reduced from $1.00 to $.85 and the quantity demanded increases
from 120 to 150. ELASTIC
$1.00 * 120 = $120.00
$0.85 * 150 = $ 127.50
SINCE THE PRICE WENT DOWN AND THE TOTAL REVENUE
WHEN UP. (IN OPPOSITE DIRECTIONS) DEMAND IS ELASTIC
The price of product Y increases from $2.00 to $3.00 and the quantity demanded drops from
90 to 80. INELASTIC
$2.00 * 90 = $180.00
$3.00 * 80 = $240.00
SINCE THE PRICE WENT UP AND THE TOTAL REVENUE
WHEN UP. (IN THE SAME DIRECTION) DEMAND IS INELASTIC
25.
The price of product Z decrease from $.10 to $.08 and the quantity demanded increases
from 1,000 to 1,050. INELASTIC
$0.10 * 1000 = $100.00
$0.08 * 1050 = $84.00
SINCE THE PRICE WENT DOWN AND THE TOTAL REVENUE
WHEN DOWN. (IN THE SAME DIRECTION) DEMAND IS INELASTIC
Match the non-price determinant with the correct example of that determinant. Show whether
demand will increase or decrease. Example: b . Peanut butter when jelly increases in price. ___
__C___ 26. Product X falls out of favor with buyers._DOWN
__E___ 27. Product X is exported to the Far East. UP
__D___ 28. Product X (normal good) when people’s income
goes up. UP
__B___ 29. Product X when the price of product Y (a close
substitute) increases. UP
__A___ 30. Product X when the price of product Z (product
Z goes with product X) decreases. UP
__F___ 31. Product X when the price of product X is
expected to be higher next week. UP
a.
b.
c.
d.
e.
f.
price of a complement
price of a substitute
taste and preferences
people’s income
number of buyers
future expectations
about price