Chapter 2

Question 1

What factors, besides price, influence demand? (4)

Answer 1

Number of consumers
Consumer income or wealth
Consumer tastes
Prices of other, related goods

Question 2

Demand choke price

Answer 2

Price at which quantity demanded of a good or service is 0

Question 3

Inverse Demand Curve

Answer 3

Solving for price as a function of quantity demanded

Question 4

Transfer

Answer 4

surplus that moves from consumer to producer or vice versa because of regulation

Question 5

Deadweight loss

Answer 5

the reduction in total surplus that occurs as a result of a market inefficiency

Question 6

Nonbinding price ceiling

Answer 6

a price ceiling set above the equilibrium market price

Question 7

Nonbinding price floor

Answer 7

a price floor set below the equilibrium market price

Question 8

What factors, besides price, influence supply? (3)

Answer 8

Production costs
Number of sellers
Sellers’ outside options (Price of good in other markets and prices of other, related goods)

Question 9

supply choke price

Answer 9

price at which suppliers find it unprofitable to produce any of a good or service

Question 10

inverse supply curve

Answer 10

solving for price a a function of quantity supplied

Question 11

What determines the magnitude of change in equilibrium price and quantity when supply or demand curve shifts? (2)

Answer 11

1. size of the shift

2. slope of the curve

Question 12

When a good is highly demand elastic…

Answer 12

relatively small increases in price result in relatively large drops in quantity demanded

Question 13

When a good is highly demand inelastic…

Answer 13

Relatively large increases in price result in relatively small drops in quantity demanded

Question 14

What is the formula for price elasticity of demand?

Answer 14

Percentage change in quantity demanded divided by percentage change in price

Question 15

What is the formula for price elasticity of supply?

Answer 15

Percentage change in quantity supplied divided by percentage change in price

Question 16

What variables affect price elasticity of demand? (5)

Answer 16

1. Availability of close substitutes
2. Breadth of the market
3. Necessity or luxury item
4. Percentage of income spent on the good
5. Time horizon of the analysis

Question 17

What variables affect price elasticity of supply? (2)

Answer 17

1, The ease at which production capacity can be expanded

2, Time horizon of the analysis

Question 18

Formula for linear elasticity of demand/supply

Answer 18

1/slope of inverse supply or demand curve x Price/quantity OR slope x price/quantity

Question 19

How do you find the slope of a line?

Answer 19

coefficient of P in original equation or coefficient of Q in inverse equation

Question 20

As you move down a demand curve, demand becomes…

Answer 20

less elastic

Question 21

Where is a demand curve perfectly inelastic?

Answer 21

At the horizontal axis

Question 22

What is the formula for income elasticity of demand?

Answer 22

percentage change in quantity demanded divided by percentage change in income or change in q/q over change in i/i

Question 23

If income elasticity of demand is negative…

Answer 23

Good is inferior

Question 24

If income elasticity of demand is positive…

Answer 24

Good is normal

Question 25

income elasticity of demand for a luxury good

Answer 25

greater than 1

Question 26

Income elasticity of demand for a necessity

Answer 26

between 0 and 1

Question 27

Formula for cross-price elasticity of demand

Answer 27

Percent change in quantity demanded of one good divided by the percent change in price of another good

Question 28

If cross-price elasticity of demand is negative

Answer 28

Goods are complements

Question 29

If cross-price elasticity of demand is positive

Answer 29

Goods are substitutes