Economics 1

Question 1

Demand

Answer 1

• Demand is the quantity of product or service that consumers are willing and able to purchase at a given price at a particular time
• Inverse relationship between the price and quantity demanded

Question 2

How does price affect the demand for an item?

Answer 2

Inverse relationship

When the prices of an item increases- demand for it decreases.

Question 3

What is a Demand Curve Shift?

Answer 3

When demand changes due to something other than price.

Positive shift → increase, move to Right

Negative shift → decrease, move to the Left

Question 4

Reasons for a Positive Demand Curve Shift (Shift Right)?

Answer 4

When demand increases at each price point when:

• Market size increases - When new consumers are available to purchase a product, such as when trade barriers between countries are removed, demand for the product will increase
• Price of substitutes go up - price of beef rises- so people buy more chicken
• Future price increase is expected - War in Middle East- people go out and buy gas
• Consumer income and wealth - For normal goods, the demand will increase if consumers have more wealth to spend on good

Question 5

Reasons for a Negative Demand Curve Shift (Shift Left)?

Answer 5

Demand decreases at each price point when

• Price of complement goes up - price of beef goes up- less demand for ketchup
• Boycott - Company commits social blunder- consumers boycott
• Consumer income rises - Demand for inferior goods drops as people have more money to spend

Consumer tastes change to have an indeterminate relationship

Question 6

How is Price Elasticity of Demand calculated?

Answer 6

E_D= % Change in Quantity Demand / % Change in Price

OR

E_D= (Change in Quantity Demand/Avg Quantity Demand) / (Change in Price/Avg Price)

Elasticity of Demand measures the sensitivity of demand to a change in price

Question 7

What is Elastic Demand?

Answer 7

If coefficient of elasticity is greater than 1, demand is elastic

i.e. sensitive to price change

Question 8

What is Unitary Demand?

Answer 8

Considered unitary if coefficient of elasticity = 1

Total revenue will remain the same if price is increased

Question 9

What is Inelastic Demand?

Answer 9

Considered inelastic if coefficient of elasticity is less than 1

i.e. NOT sensitive to price change

Question 10

Under Elastic Demand- how does price affect revenues?

Answer 10

Price increases → Revenue decreases

Price decreases →Revenue increases

Question 11

How does revenue react to price under Inelastic Demand?

Answer 11

Price increases → Revenue increases

Price decreases → Revenue decreases

Question 12

How is Income Elasticity of Demand calculated?

Answer 12

E_i= % Change Quantity Demanded / % Change in Income

Normal goods if E_i > 0 (demand increases more than income)

Inferior goods E_i (demand increases less than income)

Question 13

How is Cross-elasticity of Demand calculated?

Answer 13

E_XY = % Change in Quantity Demanded of Product X / % Change in the Price of Product Y

X and Y procut are subsitute goods if E_XY > 0

X and Y procut are complement goods if E_{XY < 0}

X and Y procut are unrelated goods if E_XY = 0

Question 14

Law of diminishing marginal utility

Answer 14

• Law of diminishing marginal utility: the more of resource consumed, the lower the marginal utility (satisfaction) will be for the next unit.
• As a result, a consumer maximizes satisfaction when the last dollar spent on each product generates the exact same amount of marginal utility

Question 15

What is the Marginal Propensity to Consume (MPC)?

Answer 15

% of the next dollar of income that the consumer would be expected to spend

How much you spend when your income increases

Calculate = Change in Spending / Change in Disposable Income

Question 16

What is the Marginal Propensity to Save (MPS)?

Answer 16

% of the next dollar of income that the consumer would be expected to save

How much you save when income increases

Calculate: = Change in Savings / Change in disposable Income

also

= 1 - Marginal Propensity to Consume

Question 17

How is the multiplier effect calculated?

Answer 17

(1 / (1-MPC)) x Change in Spending

(1 / MPS) x Change in Spending

The multiplier refers to the fact than an increase in spending by consumers, businesses, or the government has a multiplied effect on equilibrium GDP. The reason for this is that increased spending generates increases in income to businesses and consumers which in turn increases their spending, which again
in creases the income of other consumers and businesses, etc.

Question 18

How does spending change due to the multiplier effect?

Answer 18

The increase in demand ends up being larger than the amount of additional income spent in the economy due to the multiplier effect.

One consumer spends money- which:→Increases the income of a business → Increases the income of a vendor*Increases income of employees →Increases tax revenue

Question 19

Supply

Answer 19

• Supply is the quantity of a product or service that will be provided/supplied at various prices
• goes UP
• Direct relationship between the price and quantity supply

Question 20

How does a price increase affect supply?

Answer 20

When the prices of an item increases supply increases- because more sellers are willing to sell.

Question 21

What is a supply curve shift?

Answer 21

When supply changes due to something other than price

Positive shift → increase, move to Right

Negative shift → decrease, move to the Left

Question 22

What are the causes of a positive supply curve shift (shift Right)?

Answer 22

Supply increases at each price point when

• Price expectation - price will be higer for the good in the futures
• Number of sellers/producer increases - market can get flooded
• Government subsidies or technology improvements that decrease costs for suppliers

Question 23

What are the causes of a negative supply curve shift (shift Left)?

Answer 23

Supply decreases at each price point when

• Cost of producing item increases
• Prices of other goods -If other products can be produced with greater returns, producers will
  pro duce those goods.