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chp 4 instructor manual

chp 4 instructor manual - Chapter 4 DEMAND AND SUPPLY...

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Chapter 4 DEMAND AND SUPPLY QUESTIONS AND ANSWERS Q4.1 What key ingredients are necessary for the creation of economic demand? Q4.1 ANSWER Two basic conditions must be met before economic demand is created. First, there must be value associated with acquiring and using the good or service. For individuals, this value is measured in terms of utility, well-being, or satisfaction derived through consumption. For firms, this value is measured in terms of the profit created through resource employment. Second, there must be an ability to pay. Both individuals and firms must demonstrate an economic capability to acquire, or their wants will remain unfulfilled, and no economic demand will result. Q4.2 Memory chip maker Micron Technology Inc. enjoys strong demand for its products from manufacturers of computers and intelligent electronics. Describe the difference between direct demand and derived demand. Q4.2 ANSWER Direct demand is consumption demand for goods and services. Direct demand is demand by consumers based on the satisfaction or utility derived from consumption. Derived demand is indirect in the sense that it represents demand by producers based on the usefulness of inputs in the production of goods and services for final consumption. Derived demand arises when it becomes profitable for a firm to use a given input in the production of some other valuable product. Q4.3 The Ford Escape Hybrid is the first gas-electric hybrid SUV produced and sold in North America. How would Ford estimate the demand influence of growing environmental awareness by consumers? Q4.3 ANSWER Variables are included in a demand function because they are thought to affect the quantity of a product that will be purchased. Some variables such as income, education, age, family size, and so on, are included in an attempt to identify socio- economic relations that influence demand. To the extent that environmental
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76 Chapter 4 awareness is higher among the highly educated, or among those with high incomes, demand influences of environmental awareness could be captured by those variables. Otherwise, consumer interviews might identify characteristics of consumers with strong environmental concerns. Others factors , like price, price of competing goods, advertising expenditures, and so on, are included to account for closely linked economic forces as well as broader market conditions. Q4.4 The Energy Department estimates that domestic demand for natural gas will grow by more than 40% between now and 2025. Distinguish between a demand function and a demand curve. What is the difference between a change in the quantity demanded and a shift in the demand curve? Q4.4 ANSWER A demand function is a statement of the relation between the demand for a product and all variables (factors) that affect demand. The demand curve, on the other hand, is an expression of the relation between price and the quantity demanded, holding constant the effect of all other demand influencing variables. Movement along a
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chp 4 instructor manual - Chapter 4 DEMAND AND SUPPLY...

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