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Unformatted text preview: ller percentage than price.
Elasticity of demand is affected by available
substitutes, whether the good is a luxury or
necessity, percentage of income spent on the
good, and time. 108 Chapter 4 Demand To reinforce your knowledge of the key terms in
this chapter, fill in the following blanks on a separate piece of paper with the appropriate word or
1. A(n) ______ is any place where people come
together to buy and sell goods or services.
2. If, as income rises, demand for a good falls, then
that good is a(n) ______ good.
3. According to the law of demand, as the price of
a good rises, the ______ of the good falls.
4. According to the ______, price and quantity
demanded are inversely related.
5. According to the ______, as a person consumes
additional units of a good, eventually the utility
gained from each additional unit of the good
6. Demand is ______ if the percentage change in
quantity demanded is less than the percentage
change in price.
7. A downward-sloping demand curve is the
graphic representation of the ______.
8. For a(n) ______ good, the demand increases as
income rises and falls as income falls.
9. If, as the price of good X rises, the demand for Y
increases, then X and Y are ______.
10. When demand is ______, the percentage
change in quantity demanded is the same as the
percentage change in price. Understanding the Main Ideas
Write answers to the following questions to review
the main ideas in this chapter.
1. Margarine and butter are substitutes. What happens to the demand for margarine as the price
of butter rises?
2. Explain what happens to the demand curve
for apples as a consequence of each of the
a. More people begin to prefer apples to
b. The price of peaches rises (peaches are a
substitute for apples).
c. People’s income rises (apples are a normal
good). 04 (086-109) EMC Chap 04 11/17/05 4:37 PM Page 109 3. “Sellers always prefer higher to lower prices.” Do
you agree or disagree? Explain your answer.
4. In each of the following, identify whether the
demand is elastic, inelastic, or unit-elastic.
a. The price of apples rises 10 percent as the
quantity demanded of apples falls 20
b. The price of cars falls 5 percent as the quantity demanded of cars rises 10 percent.
c. The price of computers falls 10 percent as
the quantity demanded of computers rises
5. State whether total revenue rises or falls in each
of the following situations.
a. Demand is elastic and price increases.
b. Demand is inelastic and price decreases.
c. Demand is elastic and price decreases.
d. Demand is inelastic and price increases. Doing the Math
Do the calculations necessary to solve the following
1. If the percentage change in price is 12 percent
and the percentage change in quantity
demanded is 7 percent, what is the elasticity of
demand equal to?
2. The price falls from $10 to $9.50, and the quantity demanded rises from 100 units to 110 units.
What does total revenue equal at the lower price? Working with Graphs
Use Exhibit 4-7 to answer questions 1 through 3.
(P Price and Qd Quantity demanded)
EXH I BIT 1. What does Exhibit 4-7(a) represent?
2. What does Exhibit 4-7(b) represent?
3. What does Exhibit 4-7(c) represent?
EXH IBIT 4-8 (a) P TR Demand is . (b) P TR Demand is . (c) P TR Demand is . P = Price TR = Total revenue 4. In Exhibit 4-8, a downward-pointing arrow (↓)
means a decrease, an upward-pointing arrow
(↑) means an increase, and a bar (—) over a
variable means the variable remains constant
(unchanged). Fill in the blanks for parts (a)
through (c). Solving Economic Problems
Use your thinking skills and the information you
learned in this chapter to find a solution to the following problem.
1. Application. Income in the economy is
expected to grow over the next few years. You
are thinking about buying stock in a company.
Is it better to buy stock in a company that produces a normal, inferior, or neutral good?
Explain your answer. 4-7
D2 D1 D1
Qd (a) (b) (c) Go to www.emcp.net/economics and choose Economics:
New Ways of Thinking, Chapter 4, if you need more help in
preparing for the chapter test. Chapter 4 Demand 109...
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