Chapter 2

Question 1

What four things does demand depend on?

Answer 1

Information, prices of other things, income and regualtions

Question 2

Demand function

Answer 2

Q=D(p,pₛ, p꜀, Y)
- p is the price of the good
- pₛ is price of a substitute
- p꜀ is the price of a complementary good
- Y is consumer income

Question 3

What is the law of demand?

Answer 3

As the price increases, quantity demanded decreases

Question 4

Changes in other goods, income, regulations, etc on demand?

Answer 4

Causes a shift in the entire curve

Question 5

What happens to supply as prices increase?

Answer 5

Supply increases

Question 6

What 3 things does supply depend on?

Answer 6

1. Production cost
2. Regulations
3. Technology

Question 7

What is Adam Smith’s invisible hand?

Answer 7

The economy will move itself towards equilibrium, if prices are too low buyers can’t find enough sellers, and vice versa

Question 8

What is elasticity of demand?

Answer 8

percentage change in demand for a 1% change in price

Question 9

If p=0, what happens to elasticity of demand?

Answer 9

demand is perfectly inelastic; changes in price don’t effect demand

Question 10

If Q=0, what happens to elasticity of demand?

Answer 10

demand is perfectly elastic, changes in price drop demand to zero

Question 11

When is demand unitary elastic?

Answer 11

When ε=-1, the percentage change in demand is the same as the percentage change in price

Question 12

When is demand elastic?

Answer 12

ε<-1, the percentage change in demand is more than the percentage change in price

Question 13

When is demand inelastic?

Answer 13

ε>-1, the percentage change in demand is less than the percentage change in price

Question 14

What happens to elasticity of demand when the curve is a horizontal line?

Answer 14

Demand is perfectly elastic: this happens when a good has a perfect substitute

Question 15

What happens to elasticity of demand when the curve is a vertical line?

Answer 15

Demand is perfectly inelastic; telling us a good is essential

Question 16

What is income elasticity?

Answer 16

Percentage change in demand for a 1% increase in income

Question 17

What is cross-price elasticity?

Answer 17

Percentage change in demand for a 1% increase in the price of another good; relevant for substitutes and complements

Question 18

When is supply perfectly inelastic?

Answer 18

η=0

Question 19

When is supply inelastic?

Answer 19

0<η<1

Question 20

When is supply elastic?

Answer 20

1<η

Question 21

When is supply perfectly elastic?

Answer 21

η=infinity

Question 22

How to predict elasticity over time?

Answer 22

the easier it is to substitute a good, the more elastic demand will be

Question 23

What is an ad valorem tax?

Answer 23

It is a percentage if the sale price

Question 24

What is a unit or specific tax?

Answer 24

A tax that doesn’t depend on sales price

Question 25

What happens if consumer pays the tax?

Answer 25

Consumer pays the tax to the government and the price minus the tax to the supplier causing supply to shift left

Question 26

What if the tax is being charged to suppliers?

Answer 26

Consumer pays price + tax, causing demand curve to shift down

Question 27

2 reasons supply will not equal demand?

Answer 27

1. price ceiling 2. price floor