Lecture 6: Supply and Demand

Question 1

changes in the prices of inputs
higher costs –>
lower costs –>

Answer 1

higher costs –> supply decreases

lower costs –> supply increases

Question 2

new technology –>

Answer 2

new technology –> supply increases

Question 3

changes in the of other potential output
rise in the price of cupcakes –>
fall in the price of cheese –>

Answer 3

rise in the price of cupcakes –> more profitable to produce cupcakes –> devote more resources to the production of cupcakes –> supply of doughnuts decreases

fall in the price of cheese –> less profitable to produce cheese –> devote fewer resources to the production of cheese –> supply of ice cream increases

Question 4

changes in the number of producers
more sellers –>
fewer sellers –>

Answer 4

changes in the number of producers
more sellers –> supply increases
fewer sellers –> supply decreases

Question 5

changes in expected future prices
expect higher prices –>
expect lower prices –>

Answer 5

expect higher prices –> supply decreases now

expect lower prices –> supply increases now

Question 6

Elasticity

We want to measure the magnitude by which consumers change the quantity demanded in response to a change in the price of the product. The more elastic demand is……

Answer 6

We want to measure the magnitude by which consumers change the quantity demanded in response to a change in the price of the product. The more elastic demand is……the more responsive it is to price changes.

Question 7

x
price elasticity of demand = ————————————-
y

Answer 7

x=percentage change in quantity demanded

y=percentage change in price

Question 8

the price elasticity of demand

tells us the …… and
is always ……………….

Answer 8

the price elasticity of demand

tells us the percentage change in quantity demanded resulting from a 1% change in price
is always negative, so the negative sign is dropped

Question 9

when the price elasticity of demand is

greater than 1=
equal to 1=
less than 1=

Answer 9

when the price elasticity of demand is

greater than 1, demand is elastic: consumers respond a lot to a price change
equal to 1, demand is unit elastic
less than 1, demand is inelastic: consumers do not respond much to a change in price