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ECON 402 Study Guide - Quiz Guide: Ceteris Paribus, Demand Curve, Substitute GoodExam


Department
Economics
Course Code
ECON 402
Professor
William Crowley
Study Guide
Quiz

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3.1
The Demand Side of the Market
Learning Objective: Discuss the variables that influence demand.
Review Questions
1.1 A demand schedule is a table showing the relationship between the price of a product and
the quantity of the product demanded. A demand curve is a curve that shows the
relationship between the price of a product and the quantity of the product demanded.
1.2 Ceteris paribus means “all else equal”—that is, holding everything else constant when
examining the relationship between two variables.
1.3 A “change in demand” refers to a shift of the demand curve, while a “change in quantity
demanded” refers to a movement along the demand curve as a result of a change in a
product’s price.
1.4 The law of demand states that, holding all else constant, when the price of a product falls,
the quantity demanded of the product will increase (and when the price of a product rises,
the quantity demanded of the product will decrease). An increase in the price of a product
raises the relative price of the product versus other products, causing consumers to
substitute away from the higher priced product. The increase in the price of the product also
causes a decrease in the real incomes of consumers, and assuming that the product is a
normal good, leads consumers to buy less of the product.
1.5 The main variables that will cause a demand curve to shift include: (1) changes in the
prices of a related goodsubstitutes or complements; (2) changes in income; (3) changes
in tastes; (4) changes in population or demographics; and (5) changes in expected future
prices. An example of substitute goods is Coke and Pepsi, and an example of
complementary goods is hot dogs and hot dog buns. An example of a normal good may
be a name brand product, like Coca-Cola. An example of an inferior good may be a store
branded product, like Sam’s Cola (assuming that some consumers will switch from
Sam’s Cola to Coca Cola as their incomes increase). An example of changes in tastes
would be organic produce becoming more popular. An example of changes in population
or demographics would be as the number of people over the age of 65 increases, demand
for health care services will increase. An example of changes in expected future prices
would be if the prices of hybrid vehicles are expected to decline in the future, then
demand for hybrids today will decrease.
Problems and Applications
1.6 a. Substitutes
b. Complements
c. Unrelated
d. Substitutes

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1.7 Because the graphic in the article showed increases in car and truck sales at the same time
as gasoline prices decreased, the graphic assumes that gasoline is a complement for both
automobiles. If the price of a complement, in this case gasoline, decreases the demand for
its complements (cars and trucks that run on gasoline) increase.
1.8 Assuming that smartphones and smartwatches are substitutes, a decline in smartphone
prices, holding other factors constant, will decrease the demand for smartwatches.
Therefore, the demand curve for smartwatches will shift to the left.
1.9 a. Because the price of a substitute good has declined, the demand curve for Big Macs
will shift to the left from D1 to D2.
b. The coupon results in a cut in the price of Big Macs, so there will be a movement
down the demand curve for Big Macs.
c. Because for most people Big Macs and fries are complements, the demand curve for
Big Macs will shift to the left from D1 to D2.
d. The information on nutrition may well cause at least some consumers to decide to eat
healthier food, so the demand curve for Big Macs will shift to the left from D1 to D2.
e. The demand curve for Big Mac’s will shift. If the Big Mac is an inferior good, the
demand curve will shift to the left from D1 to D2. If the Big Mac is a normal good,
the demand curve will shift to the right.
1.10 The demand for UGG boots decreased from 2016 to 2017, which could be caused by a
decrease in the price of leather boots, which are a substitute good (UGG boots are
sheepskin boots), by a decrease in national income, assuming UGG boots are normal
goods, by a decrease in the taste (preference) for UGG boots as a result of a campaign by
animal rights activists against using sheepskin to make boots, or by any other factors that
decrease demand.
1.11 A movement along the demand curve from point A to point B would be caused by a
decrease in the price of traditional wings at Buffalo Wild Wings. A shift to the right of
the demand curve from point A to point C could be caused by an increase in the price of
pizza or steak (substitutes for wings), an increase in national income (assuming wings at
Buffalo Wild Wings are normal goods), an increase in the taste (preference) for wings at

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Buffalo Wild Wings as a result of a successful advertising campaign, or by other factors
that increase demand.
1.12 A “killer app” for smartwatches (the app would be a complement for smartwatches)
should make smartwatches more popular and differentiate smartwatches from
smartphones. But if there is no “killer app” for smartwatches, then smartwatches and
smartphones are closer substitutes.
1.13 China’s one-child policy increased the relative demand for goods and services consumed
by the population over age 14 and increased the relative demand for goods and services
consumed by boys relative to girls. So the demand for children’s toys and children’s
books decreased. The demand for male clothing increased relative to the demand for
female clothing. (In 2015, the Chinese government announced that it planned to end its
one-child policy.)
1.14 The data do not indicate that the demand curve for Priuses is upward sloping. It is likely
that factors such as income, fuel prices, and the prices of other hybrid vehicles have
changed during these three years. Therefore, the data are likely to represent points from
three different demand curves.
1.15 You should disagree because a change in the price of oil affects the quantity of oil
demanded, but does not affect the demand for oil.
1.16 You should disagree. The journalist made a common error. A decrease in the price of
gasoline would result in an increase in the quantity demanded of gasoline, not an
increase in the demand for gasoline.
1.17 a. Although per capita incomes may be lower in China than in some high-income
countries, China’s large population and the rapid economic growth China has
experienced in recent years means there are many potential buyers of iPhones in
China. In addition, many Chinese consumers may not currently own a smartphone,
which means Apple might have an easier time convincing consumers to switch from
using a regular cellphone to an iPhone than it would to switch from another brand of
smartphone.
b. It is likely that industry analysts from the United States and other Western countries
are not as familiar with Chinese markets as they are with markets in their own
countries. The rapid growth of incomes in China after 1980 has resulted in significant
increases in Chinese consumers’ incomes. It can be difficult to know which products
Chinese consumers will spend their increased incomes on. These factors make it
harder to forecast sales in China than in other countries.
3.2
The Supply Side of the Market
Learning Objective: Discuss the variables that influence supply.
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