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Do demand curves have a positive or negative slope?
Negative
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Do supply curves have a positive or negative slope?
Positive
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What is the intersection of the supply and demand curves called?
Equilibrium
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What is ceteris paribus?
All other things being equal
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What happens to the demand curve when the price of substitutes changes?
- Increase- the curve shifts right (the consumer moves away from substitutes)
- Decrease- the curves shifts left (the consumer moves toward substitutes)
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What happens to the demand curve when the price of complementary goods changes?
- Increase- the curve shifts left (consumers must pay more for the complement and therefore reduce consumption of both goods)
- Decrease- the curve shifts right (consumers pay less for the complement and increase consumption of both goods.
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On supply and demand curves, which axis is price and which is quantity?
The x-axis is quantity and the y-axis is price. Marshall started this convention.
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What happens to the demand curve when income changes?
- Increase- Curve shifts right for normal goods (as consumers are able to purchase more of a good at the same price)
- Decrease- Curve shifts left for inferior goods (as consumers purchase less of inferior goods and substitute to normal goods).
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What is an inferior good?
Goods for which demand decreases as income increases. Examples: used cars and clothing, intercity bus travel, canned food, etc.
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What is a normal good?
Goods for which demand increases as income increases.
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What moves when prices change?
Move on the curve
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What moves when other variables change?
Move the curve itself
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What is utility?
Happiness derived from an individual satisfying their tastes. This need not be material!
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What are the assumptions of indifference analysis?
- 1. Consumers are driven by the maximization of utility.
- 2. Consumers and producers are knowledgeable.
- 3. Law of Diminishing Marginal Rate of Substitution.
- 4. More is preferred to less.
- 5. Preferences are transitive (also known as "consumers are rational").
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What is an indifference curve?
In a plot of a product and its substitute, each point represents (and so does the curve) equal utility. A consumer would be indifferent to any choices presented from the curve.
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What is the law of demand?
The principle that there is a negative relationship between price and quantity. As prices increase, demand falls, and vice versa.
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What are the determinants of demand?
- Tastes and preferences
- Income
- Price of related goods
- Number of buyers
- Expectations about future prices, incomes, and product availability
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What is the difference between a change in demand versus a change in quantity demanded?
- Change in demand: determinants of demand change so the demand curve shifts.
- Change in quantity demanded: the price of a good changes so there is movement along the curve.
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What is elasticity?
Responsiveness of one variable to changes in another.
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What is price elasticity of demand  ?
Measure of how responsive quantity demanded is to changes in price.
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What are the assumptions of the Theory of Marginal Utility?
- Individuals look to maximize utility.
- As quantity increases, each additional unit is valued less than the previous (law of diminishing marginal utility).
- Utility is cardinally measurable.
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