AGEC Test 2 - Chapters 5,6,7,8

Question 1

Define elasticity

Answer 1

the ability of an object or material to resume its normal shape after being stretched or compressed

Question 2

What are the major forms of elasticity?

Answer 2

1. price elasticity of demand
2. income elasticity of demand
3. Cross-price elasticity of demand

Question 3

Define price elasticity of demand

Answer 3

a measurement of the change in demand for a good or service in relation to a change in its price

Question 4

Price elasticity in relation to supply and demand

Answer 4

1. When prices rise, demand usually drops. When prices drop, demand usually rises.
2. When supply rises, prices usually drop. when supply drops, prices usually rise.

Question 5

The formula for price elasticity of demand

Answer 5

% change in quantity demanded divided by % change in price

Question 6

Define Giffen Good

Answer 6

a non-luxury product for which demand increases as the price increases and vice versa, thus defying standard laws of demand

Question 7

Define normal good

Answer 7

a good that consumers demand more of as their income increases

Question 8

Define inferior good

Answer 8

a good whose demand decreases when consumer income rises, unlike normal goods, for which the opposite is observed

Question 9

An example of a giffen good would be?

Answer 9

bread, rice or wheat

Question 10

Income elasticity of demand formula

Answer 10

% change in quantity demanded divided by % change in consumers real income

Question 11

Define cross-price elasticity of demand (XED)

Answer 11

measures the relationship between two goods when the price of one changes

Question 12

What is cross price elasticity for?

Answer 12

Cross-price elasticity measures how sensitive the demand
of a product is over a shift of a corresponding product
price.

Question 13

What is an example of cross price?

Answer 13

A cross-price elasticity example could include two goods
such as coffee and tea. If the price of coffee were to
increase, the quantity of tea demanded would also
increase. This indicates that the two products are
substitutes for one another.

Question 13

What are the determinants of the elasticity of demand

Answer 13

Availability of substitutes for the commodity
▪ Alternative uses for the commodity
▪ Type of market
▪ Farm level vs. retail level
▪ Domestic vs. export market
▪ Time frame
▪ The percentage of the income spent on the
commodity
▪ Luxury vs. necessity

Question 14

The formula for cross price elasticity of demand

Answer 14

% change in quantity demanded of product A divided by % change in price of Products B

Question 15

Define complementary goods

Answer 15

goods that we normally use together

ex. as the price of one goes up, the demand for the other goes down

Question 16

Types of price elasticity of demand

Answer 16

1. Perfectly elastic demand (Ed = infinity)
2. Perfect inelastic demand (Ed = 0)
3. Unitary elastic demand (Ed = 1)
4. Relatively elastic demand (Ed > 1)
5. Relatively inelastic Demand (Ed < 1)

Question 17

Define perfectly elastic demand

Answer 17

a demand where any price increase would cause the quantity demanded to fall to zero & reducing the price of a good or service will not increase sales

Question 18

What is the perfectly elastic demand curve? Why is that its curve?

Answer 18

Perfectly elastic demand curve
is horizontal straight line. This is because at the given price
the quantity demanded is infinite, even if there is a slight
change in the price the demand
becomes infinity & hence the curve is flat.

Question 19

Marginal Revenue Formula

Answer 19

change in total revenue divided by change in quantity sold

Question 20

Revenue formula

Answer 20

Quantity x Price

Question 21

Marginal Cost Formula

Answer 21

Change in total cost divided by change in quantity

Question 22

Average variable cost formula

Answer 22

variable cost divided by output

Question 23

Average fixed cost formula

Answer 23

total fixed cost divided by output

Question 24

Fixed cost formula

Answer 24

total cost of production - variable cost per unit X number of units produced

Question 25

total variable cost formula

Answer 25

quantity of output X variable cost per unit of output

Question 26

Total cost formula

Answer 26

fixed cost + variable cost

Question 27

Marginal Product Formula

Answer 27

increase in production output divided by change in variable input

Question 28

Define law of diminishing marginal returns

Answer 28

“As successive units of a variable input are added to a production process with the other inputs held constant, the marginal physical product (MPP) eventually declines”

Question 29

Average physical product (APP) formula

Answer 29

APP = TPP/ amount of input

Question 30

Define production function

Answer 30

Relationship between output and the factors of production (labor, capital, land, and management). Y=f(x) Output = f(labor, capital, land, & management)

Question 31

Define monopsony

Answer 31

a market in which there is a single buyer

Question 32

Define oligopsony

Answer 32

a market with only a few buyers

Question 33

Define monopsony power

Answer 33

the ability of the buyer to affect the price of the good or pay less than the price that would exist in a competitive market

Question 34

Define perfect competition

Answer 34

a theoretical market structure in which there are no monopolies

Question 35

Define resources

Answer 35

A service or other asset used to produce goods & services that meet human needs & wants.

Question 36

Market

Answer 36

a place where parties can gather to facilitate the exchange of goods and services

Question 37

Define economic good

Answer 37

goods which involve opportunity cost as they are scarce

Question 38

Define free good

Answer 38

goods which have no opportunity cost

Question 39

Define price

Answer 39

the amount of money that has to be paid to acquire a given product.

Question 40

Firm's Supply Curve

Answer 40

The firm’s supply curve begins at the point on the marginal cost curve where the price of the firm’s product exceeds the shut down price (PSD). As the price rises, the firm equating MC with price will produce more.

Question 41

Define producer surplus

Answer 41

Represents the profit realized by firms in the market for specific quantities supplied.

Question 42

When does market surplus exist?

Answer 42

when the quantity supplied exceeds the the quantity demanded.

Question 43

When does market shortage exists?

Answer 43

when the quantity demanded exceeds the quantity supplied.