Chapter 2

Question 1

What is microeconomics?

Answer 1

This is a branch of economic theory that studies the specific choices of individual agents, relying on theories and models. It looks at the relationship between consumers and firms.

Question 2

what are theories and models?

Answer 2

These are explanations of how things work that will aid our understanding and predict how and why economic entities behave in the way they do.

Question 3

What is supply?

Answer 3

Supply is the combined amount of goods that all producers in the market are willing to sell.

Question 4

What is demand?

Answer 4

Demand is the combined amount of goods that all consumers in the market are willing to buy.

Question 5

What are the four key assumptions of the supply and demand model?

Answer 5

1. Restrict focus to supply and demand in one single market
2. In this market homogeneous goods are sold. These are commodities
3. All goods are sold for the same price, everybody has the same information etc.
4. There are lots of players in the market.

Question 6

What is a market?

Answer 6

A market in the strictest sense is defined by a specific product, location and time.

Usually, markets are defined more broadly, which provides more data to analyze. Does make the model less realistic.

Question 7

What are commodities in the supply and demand model?

Answer 7

Commodities are goods where different varieties of the good are considered interchangeable by consumers.

Question 8

Name the five most important factors influencing demand.

Answer 8

1. Price
2. Number of consumers
3. Consumer income
4. consumer tastes: might change due to external factors
5. Price of other goods: substitutes and complements.

Question 9

What is a demand curve?

Answer 9

This shows the relationship between quantity of a good demanded by consumers and the good’s price, considering all other factors as constant. The slope goes downward and can also be expressed mathematically.

Question 9

What are substitutes?

Answer 9

Substitutes are goods that can be used instead of another good. This might create less demand for the good in question.

Question 10

What are complements?

Answer 10

Complements are goods that are purchased and used in combination with another good ( car and oil, mac and cheese).

Question 11

What is the demand choke price?

Answer 11

This is the price at which quantity demanded = 0

Question 12

What is an inverse demand curve?

Answer 12

Demand curve written in the form of price as a function of quantity demanded (P = …)

Question 13

What happens when non-price factors change?

Answer 13

When non-price factors change, the entire demand curve changes and moves to the right (more demand) or left (less demand).

Question 13

What to the demand curve when the price elasticity changes?

Answer 13

When this happens, the steepness of the curve will change. It will get steeper if the elasticity decreases (high price change has low Q impact) and becomes flatter when the elasticity increases (price change has bigger effect on Q).

Question 14

What is change in quantity demanded?

Answer 14

Change in quantity demanded means that there is a movement along the demand curve, occuring as a result of a change in a good’s price.

Question 15

What is a change in demand?

Answer 15

A change in demand means there is a shift of the entire demand curve, as a result of changes in non-price factors.

Question 16

Which four factors influence supply?

Answer 16

1. Price
2. Suppliers’ cost of production: changes in input prices and production technology
3. Number of sellers
4. Sellers’ outside options: selling tomatoes somewhere else or selling different products.

Question 17

What is production technology?

Answer 17

Production technology are the processes used to produce, distribute and sell the goods. More efficient processes lower production costs.

Question 18

What is a supply curve?

Answer 18

a supply curve shows the relationship between the number of supplied goods and the price of those goods, considering all other factors constant. It slopes upwards.

Question 19

What is the supply choke price?

Answer 19

This is the price at which there is no producer willing to produce a good. At this point Quantity supplied = 0.

Question 20

What is the inverse supply curve?

Answer 20

This is the supply curve written in P as a function of Q (P=)

Question 21

What is a change in quantity supplied?

Answer 21

This means there is a movement along the supply curve as a result of a change in the price.

Question 22

What is a change in supply?

Answer 22

This means a shift of the supply curve as a result of changes in non-price factors.

Question 23

What is the equilibrium price?

Answer 23

Price in which Qd=Qs

Question 24

Why will the supply and demand always move back to equilibrium?

Answer 24

1. If there is excess supply, producers will need to lower their price in order to attract buyers for their goods (getting to equilibrium)
2. If there is excess demand and a low price, consumers will be willing to pay a higher price to obtain a good, which drives up the price, reaching market equilibrium.

Question 25

Which factors determine the size of price and quantity changes?

Answer 25

1. Size of the shift
2. Slope of curves: flat curve means bigger difference in Q, steep curve bigger difference in P

Question 26

What is elasticity?

Answer 26

This is the ratio of percentage change in one value to percentage change in another value

Question 27

What is price elasticity of demand?

Answer 27

% change in Qd/% change in P. This is always nonpositive

Question 28

What is the price elasticity of supply?

Answer 28

% change in Quantity supplied / % change in Price.

This is always nonnegative

Question 29

What do high and low elasticity of demand mean for consumers?

Answer 29

1. High elasticity of demand menas that there are lots of alternatives available to consumers
2. Low elasticity (inelasticity) means there are few alternatives available to consumers.

Question 30

what do high and low elasticity of supply mean for producers?

Answer 30

1. High elasticity of supply menas it’s easy for producers to change production quantity because of price
2. Low elasticity (inelasticity) of supply means that suppliers are fairly unresponsive to price changes. Often due to inflexibility

Question 31

What is the classification of elasticities by magnitude?

Answer 31

1. Elastic: absolute value exceeds 1
2. Inelastic: absolute value between 0 and 1
3. Unit elastic: absolute value = 1
4. Perfectly inelastic: elasticity =0. Demand curve is vertical
5. Perfectly elastic: elasticity = infinite. Demand curve is horizontal.

Question 32

What is income elasticity?

Answer 32

Ratio of percentage change in Qd / % change in consumer income.

Question 33

Classification of income elasticities?

Answer 33

1. Inferior goods: negative income elasticities: more income decreases Q
2. Normal goods: positive income elasticities: Income increase, Q rises
3. Luxury goods: positive exceeding 1, income elasticity.

Question 34

What is cross-price elasticity of demand?

Answer 34

The ratio of percentage change in Qd1 compared to the percentage change in P2.

If the price of good 2 rises, Qd for good 1 rises and vice versa

Question 35

Classification of cross-price elasticities

Answer 35

1. Positive: goods are substitutes
2. Negative: goods are complementary.