Chapter Three

Question 0

Law of demand

Answer 0

Inverse relationship between price and quantity demanded—negative slope

Question 1

Market

Answer 1

Brings together buyers and sellers

Question 2

Determinants of demand

Answer 2

1) Change in Taste
2) Amount of buyers
3) Income of buyers
4) Prices of related goods
5) Consumer expectations

Lead to movement of the curve

Question 3

Changes in the quantity of demand

Answer 3

Movement of the point

Question 4

Law of supply

Answer 4

Direct relationship–positive slope

Question 5

Determinants of supply

Answer 5

1) Resource prices
2) Technology
3) Taxes and subsidies
4) Prices of other goods
5) Producer expectations
6) Number of sellers

Question 6

Equilibrium price

Answer 6

Intentions of buyers and sellers match

Supply=demand

Question 7

Allocative efficiency

Answer 7

Mix of goods and services most highly valued by society

Question 8

How does the equilibrium price change if the supply increases and the demand increases?

Answer 8

The supply increasing would drop the equilibrium price the demand rising would boost it so it would stay roughly the same

Question 9

If both the supply and demand decrease what will happen to the equilibrium price?

Answer 9

It will fall

Question 10

Decrease in supply

Answer 10

Increases equilibrium price and reduces the equilibrium quantity

Question 11

Increase in demand

Answer 11

Boosts both the equilibrium price and quantity

Question 12

Price ceiling

Answer 12

A line underneath the equilibrium in order to help consumers. It leads to a shortage

Question 13

Price Floor

Answer 13

Line above the equilibrium to help suppliers and leads to a surplus

Question 14

Do price floors and ceilings change supply and demand?

Answer 14

NO

Question 15

Tax Supply Demand Graph

Answer 15

Supply shifts in
Both consumers and producers lose
Deadweight loss
Government takes center rectangle for taxes (tax revenue)

Question 16

Price elasticity of demand

Answer 16

Responsiveness of consumers to a price change is meadured by a product’s price elasticity of demand

Question 17

Elastic

Answer 17

When price changes cause large changes in the quantity purchased

Question 18

Inelastic

Answer 18

When there is not a real change in quantity purchased due to a price change

Question 19

Ed=

Answer 19

% change in quantity demanded of product X/ % change of price of product X

Will always be negative—–absolute value

Question 20

Midpoint formula

Answer 20

Ed= change in quantity/sum of quantities/2

Question 21

Ed>1

Answer 21

Elastic

Question 22

Ed<1

Answer 22

Inelastic

Question 23

Ed=1

Answer 23

Unit elastic

Question 24

Perfectly inelastic

Answer 24

Absolutely no consumer response, Ed=0 Vertical demand

Question 25

Perfectly elastic

Answer 25

Ed=infinity | Horizontal demand

Question 26

Total Revenue

Answer 26

TR=P*Q If demand is elastic, decrease in price will increase TR (inverse) If demand is inelastic, decrease in price will decrease the TR (direct) Unit elastic= no change in TR

Question 27

Elasticity along a demand curve

Answer 27

Depends on the location of the point...differs throughout curve

Question 28

Determinants of Ed

Answer 28

1) Substitutability--more substitutes=more elasticity 2) Proportion of income 3) Luxuries or necessities? 4) Time

Question 29

Price elasticity of supply

Answer 29

Es= % change in quantity supplied/ % change in price degree of price elasticity of supply depends on how easily producers can shift resources for alternative use

Question 30

Immediate market period

Answer 30

length of time over which producers are unable to respond to a change in price with a change in quantity

Question 31

Short run (microeconomics)

Answer 31

Period of time too short to change plant capacity but long enough to use the fixed size plant more or less intensely

Question 32

Long run

Answer 32

Time period long enough to adjust plant size

Question 33

Cross elasticity of demand

Answer 33

how sensitive consumer purchases of one product are to a change in the price of another product (for understanding complementary goods) Exy= % change in quantity demanded of X/ % change in price of product y if + then substitutes if - then complements if 0 then unrelated

Question 34

Income elasticity of demand

Answer 34

measures the degree to which consumers respond to a change in income by buying more or less of a good Ei= % changed in quantity demanded/ % change in income ``` Normal= Ei= + Inferior= Ei= - ```

Question 35

TR and elasticity

Answer 35

Rubber band | Price and TR move in opposite directions

Question 36

TR and inelasticity

Answer 36

Pencil | Price and TR move in the same direction

Question 37

Determinants of elasticity of supply

Answer 37

Time period

Question 38

Long period

Answer 38

Elastic

Question 39

Horizontal elasticity of supply

Answer 39

more elastic

Question 40

Vertical elasticity of supply

Answer 40

more inelastic

Question 41

Taxes with relatively inelastic versus elastic demand (same tax/shift in supply)

Answer 41

Elastic has more deadweight loss Consumers pay more tax when demand is inelastic Producers pay more with elastic More tax revenue with relatively inelastic demand

Question 42

If price falls and demand is inelastic then TR

Answer 42

decreases

Question 43

Price rises and demand is elastic then TR

Answer 43

decreases

Question 44

Price rises and supply is elastic then TR

Answer 44

increases

Question 45

Price rises and supply is inelastic then TR

Answer 45

increases

Question 46

Price rises and demand is inelastic TR

Answer 46

increases

Question 47

Price falls and demand is elastic then TR

Answer 47

increases

Question 48

Price falls and demand is unit elastic TR

Answer 48

is unchanged

Question 49

A downward sloping demand curve can be explained by

Answer 49

Diminishing marginal utility the substitution effect the income effect

Question 50

Quantity demanded is a

Answer 50

shift of the point

Question 51

Demand is a

Answer 51

shift in the curve

Question 52

Elasticity questions

Answer 52

p and q move in opposite directions

Question 53

if TR remains constant

Answer 53

unit elastic

Question 54

The substitution effect causes a consumer to buy less of a product when the price increases because the

Answer 54

product is now more expensive compared to similar products