1. Chapter 4: Demand Answers

2. 4.1 Answers: What is Demand?

3. 1)What is the definition of DEMAND?
Combination of quantities that someone would be WILLING AND ABLE to buy over a range of possible prices at a given moment.
2)What is the definition of MICROECONOMICS?
A branch of economic theory that deals with behavior and decision making by small units such as individuals, households, and/or firms.

4. 3)In order to calculate the demand for something, what variables are you looking at?
Price of the product and quantity of the product
4) What does the term ceteris paribus mean?
“All other things held constant”
How does this apply to demand?
We consider ONLY Price and Quantity.
Can there be a problem with this assumption?
There are a LOT of things other than price and quantity that can impact our desire to purchase something.

5. 5)What is a DEMAND SCHEDULE?
It is a table or “listing” that shows the quantity demanded for a product at all possible prices that may prevail in the market at a given time for an individual
6)How can prices serve as an incentive for individuals when it comes to “demand”?
We like lower prices, so it makes sense that if prices drop, we will buy more of it…if prices go up, we are likely to buy less of it.

6. 7)In the issue of “burritos”, what are some other factors besides price that would influence someone to purchase a burrito that are NOT considered when looking at “demand”?
INCOME LEVEL, HUNGER LEVEL, WHETHER OR NOT HE EVEN LIKES BURRITOS????
8)What is a DEMAND CURVE?
It is a graph that shows the quantity demanded at each and every price that could prevail in the market at a given time for an individual.

7. 10)Why is the law of demand considered a “LAW”?
9)What is the LAW OF DEMAND? What does it mean that there is an “INVERSE RELATIONSHIP” between price and quantity demanded?
It is a rule stating that more will be demanded at lower prices, and less will be demanded at higher prices; An INVERSE relationship exists because as price goes UP, quantity goes DOWN…and as price goes DOWN, quantity goes UP.
10)Why is the law of demand considered a “LAW”?
Because it is a theory that proves to be true pretty much all the time that we study it.

8. 12)What does the term utility mean?
11)What is a MARKET DEMAND CURVE? Why do you think that a business would care more about the market demand curve than the regular demand curve?
It is a demand curve that shows the quantity demanded by EVERYONE that is willing and able to purchase a product at all price levels. If we produce something, we need to look at the entire market, not just small groups of individuals.
12)What does the term utility mean?
The amount of usefulness or satisfaction that someone gets from the use of a product or service.

9. 13)How is MARGINAL UTILITY different than regular utility?
It is the EXTRA USEFULNESS we get from acquiring or using one more unit of a product or service.
14)What does it mean to say that we have DIMINISHING MARGINAL UTILITY as we by more and more of a product?
The more we use something there will be a decrease in ADDITIONAL satisfaction or usefulness as we keep buying and using additional units. (think about water/thirst…after the first bottle of water, the second one won’t be as useful to you).

10. Chapter 4.2: Factors Affecting Demand

11. 1) What is a CHANGE IN QUANTITY DEMANDED
1) What is a CHANGE IN QUANTITY DEMANDED? What is the “only thing” that can cause this principle of economics to take place?
It is a movement ALONG the demand curve showing that a different quantity is purchased if the price changes. The only thing that causes this is a change of price.

12. 2) What does it mean when they say that “quantity demanded” changes due to the INCOME EFFECT?
The amount demanded changes because of the change in “income” that a person has if a price changes.
If you have $100 of spendable cash each week, and you normally purchase coffee every morning for $2.00 per trip, you normally spend $14 a week on coffee, leaving you $86 left over. What if the price of coffee drops to $1.00 per trip? Now you are spending $7 per week on coffee and have $93 left over What if the price goes to $3.00? 

13. OR 3)What is the SUBSTITUTION EFFECT?
The portion of the change in quantity demanded that is due to a change in the relative price of the good (relative to other goods that are similar). In the coffee example, suppose your reason for coffee is simply the caffeine. Well, if it goes to $3.00 per cup, but the price of soda or tea has not changed, you are likely to decide that you can get the same benefit with the soda or tea, so you “substitute” tea for coffee.
4)When there is a “change in quantity demanded” (either up OR down), does the demand curve move/shift?
NO! OR

14. 5) What is a CHANGE IN DEMAND?
Different amounts of a product are demanded at every price, causing the entire demand curve to move either to the right or to the left.
6) What are some factors that could cause a change in demand?
Consumer Income, Consumer Tastes, Price of RELATED goods (either complements or substitutes), future expectations, and the number of consumers.

15. 7)What are some things that cause people to change their minds about what to purchase?
Advertising, fashion trends, peer group pressure, and changes in the season, to name a few.
8)What are SUBSTITUTES? How can these types of products have an impact on demand?
Products that can be used in place of the product you are looking at. If there are products that can be used to satisfy the need or want, and the price of your product goes up, you could see people decide to purchase that other product (the substitute). This would reduce the demand for YOUR product and INCREASE the demand for the substitute product.

16. 9)What are COMPLEMENTS? What impact to complementary products have on demand?
Complements are products that are used together…the use of one increases the use of the other. If the price goes up for one, the demand goes down for both (and of course if the price goes down for one, the demand goes up for both).

17. Read over the section on “Expectations” and use what you read to help answer questions 10 and 11:
10)According to economic theory, if you find out that the next generation of cell phones will be coming out in 1 year, what would you expect to happen to the demand for cell phones during the next year? WHY?
It would decrease in the short term because many people would wait to get the next generation of phones (save now, spend later)
11) Suppose you live in North Dakota, and it is currently September, and you hear that this will be the coldest and snowiest winter in 50 years. How could this impact your purchasing behavior in September and October, even though it is not too cold yet?
Even though it is still warm, demand for winter products (boots, jackets, shovels, etc..) will increase in the short term to prepare for the future. You don’t want to go shopping at the last second before the first storm and see that no stores have this stuff!!!

18. 12)How does total population (total number of consumers) impact demand for products?
Obviously, the more people out there, the more may demand the product…the less there are, the fewer will demand it.
13) Is a change in population ALWAYS predictable? Any examples of “unexpected” increases or decreases in total consumers in your market?
NO- Birthrates are not constant;
Look at the Gulf Coast after Katrina (less demand in Louisiana, MORE demand in Houston)…Etc.

19. SECTION 3: Elasticity of Demand

20. 2) What is DEMAND ELASTICITY?
1)What is ELASTICITY?
It is a measure of how “responsive” a dependent variable is to a change in an independent variable.
2) What is DEMAND ELASTICITY?
How “responsive” the demand for a product is when there is a change in price.

21. 3) What does it mean to say that demand is ELASTIC
3) What does it mean to say that demand is ELASTIC? What are some products that tend to have elastic demand?
When a change in price causes a “relatively large” change in quantity demanded…green beans, corn, toys, etc.
4)What does it mean to say the demand is INELASTIC? What types of products are going to have inelastic demand?
When a change in price results in a “relatively smaller” change in quantity demanded…medicine, gasoline (for at least awhile)…things you have to purchase no matter what the price is.

22. 6)What are “total expenditures”? How do you calculate this?
5)What does it mean to say that demand is UNIT ELASTIC? Are there a lot of products that are unit elastic?
When a change in price results in a “proportional change” in quantity demanded…really, not any examples of pure “UNIT ELASTIC”…
6)What are “total expenditures”? How do you calculate this?
TOTAL REVENUE that companies make when they sell products…it is calculated by multiplying the total number of units demanded at each price along the demand curve.

23. 7) When using the “total expenditures” approach to determining elasticity of demand for a product, how do you determine if it is elastic, unit elastic, or inelastic?
ELASTIC- Change in price and change in total revenue move in OPPOSITE DIRECTIONS.
UNIT ELASTIC- There is no change in revenue regardless of change in price.
INELASTIC- A change in price and change in revenue move in the SAME DIRECTION.

24. 8)If you are a business, what are some things you can do to increase your revenue?
Stay open more hours, increase your advertising…you could even raise your price.
9) If you are a business owner, why do you need to understand the elasticity of demand for your product?
Because if you don’t know what may happen with a change in prices, you could lose business, and therefore lose revenue.

25. 11)What are some products that you can “delay” purchasing?
10) If you cannot delay the purchase of a product, is that product more ELASTIC or INELASTIC?
INELASTIC
11)What are some products that you can “delay” purchasing?
Coffee, snacks, some food items, sometimes gasoline (if you have other gas stations available).

26. 12) What are some products that you really cannot delay purchasing?
Medication, Tobacco and other things we could be “addicted” to.
13)Define ADEQUATE.
Just enough to satisfy (or meet) a certain requirement.

27. 14) If adequate substitutes for a product are available, will that product tend to be more ELASTIC or INELASTIC?
ELASTIC
15) Why is it more difficult for the US Postal Service to increase prices on stamps than it was many years ago?
More substitutes for mail, such as , fax machines, cell phones, the Internet, etc.

28. 16)If you live in a remote town, far away from any other cities, and the local gas station increases gas prices a lot. Will the demand for gasoline at that station in the city be more elastic or inelastic when compared to the demand for gas at a gas station in a large city with many stations? WHY?
INELASTIC, since in a small town, you may not have the ability to drive to a competitor to get gas. In a large city, if a certain gas station increases prices, you can go across the street to buy it cheaper.
In general, if the purchase of a product uses up a large portion of your income, will demand for that product tend to be more elastic or inelastic?
More ELASTIC.