Market Influences on Business Pt. 1

Question 1

What is the difference between macroeconomics and microeconomics?

Answer 1

macro - focuses on how human behavior affects outcomes in highly aggregated markets

micro - focuses on how human behavior affects the conduct of more narrowly defined units, including a single individual, household, or business firm

Question 2

What is the demand curve?

Answer 2

it illustrates the maximum quantity of a good that consumers are willing and able to purchase at each and every price, all else being equal

a change in demand = movement of the demand curve

Question 3

What is quantity demanded?

Answer 3

the quantity of a good or service individuals are willing and able to purchase at each and every price, all else being equal

a change in quantity demanded = movement along the demand curve

Question 4

T/F: the fundamental law of demand states that the price of a product or service and the quantity demanded of that product or service are inversely related

Answer 4

True

Question 5

What is the substitution effect?

Answer 5

it refers to the fact consumers tend to purchase more (less) of a good when its price falls (rises) in relation to the price of other goods

Question 6

What is the income effect?

Answer 6

as prices are lowered with income remaining constant, people will purchase more or all of the lower-priced products

Question 7

What are some factors that shift the demand curve (other than price)?

Answer 7

changes in wealth, changes in the price of related goods (substitutes and complements), changes in consumer income, changes in consumer tastes or preferences for a product, changes in consumer expectations, and changes in the number of buyers served by the market

Question 8

What is the supply curve?

Answer 8

it illustrates the maximum quantity of a good that sellers are willing and able to produce at each and every price, all else being equal

change in supply = movement of the supply curve

Question 9

What is quantity supplied?

Answer 9

the amount of a good that producers are willing and able to produce at each and every price, all else being equal

change in quantity supplied = movement along the supply curve

Question 10

What are some factors that can shift the supply curve?

Answer 10

changes in price expectations of the supplying firm, changes in production costs (price of inputs), changes in the price or demand for other goods, changes in subsidies or taxes, and changes in production technology

Question 11

What is market equilibrium?

Answer 11

when there are no forces acting to change the current price/quantity combination

if supply and/or demand curves shift, the equilibrium price and quantity will change

market clearing quantity is the equilibrium quantity; market clearing is the idea that the market will eventually be cleared of all excess supply and demand (all surpluses and shortages) assuming that prices are free to change

an increase in demand and supply results in an increase in equilibrium quantity, but the effect on price is indeterminate (drawing the graphs will help with visualizing this)

Question 12

Fact: the government will sometimes intervene in a market by mandating a price different from the market price (causing either a shortage or surplus); this most often is accomplished by using price ceiling and price floors

Answer 12

price ceilings - a maximum price that is established below the equilibrium price which causes shortages to develop; price ceilings cause prices to be artificially low, creating a greater demand than the supply available

price floors - a minimum price set above the equilibrium price which causes surpluses to develop; price floors are minimum prices established by law, such as minimum wages and agricultural price supports

Question 13

What is elasticity?

Answer 13

a measure of how sensitive the demand for, or the supply of, a product is to a change in price

Question 14

Price elasticity of demand

Answer 14

price elasticity of demand = % change in quantity demanded / % change in price

price inelasticity (absolute price elasticity of demand < 1.0); the smaller the number, the more inelastic the demand for the good; if price inelasticity is zero, demand is perfectly inelastic (this means the demand curve is vertical)

price elasticity (absolute price elasticity of demand > 1.0); the greater the number, the more elastic the demand

unit elasticity (absolute price elasticity of demand = 1.0); demand is unit elastic if the percentage change in the quantity demanded cased by a price change equals the percentage change in price

factors that affect price elasticity of demand: demand is more elastic when there are a lot of substitutes (and vice versa) and the longer the time period, the more product demand becomes elastic as more choices are available

effects of price inelasticity on total revenue = positive relationship

effects of price elasticity on total revenue = negative relationship

effects of unit elasticity on revenue = no effect

Question 15

Price elasticity of supply

Answer 15

price elasticity of supply = %change in quantity supplied / % change in price

price inelasticity (supply < 1.0); if price inelasticity is zero, supply is perfectly inelastic (this means the supply curve is vertical)

price elasticity (supply > 1.0)

unity elasticity (supply = 1.0)

factors that affect price elasticity of supply: the feasibility of producers storing the product and the time required to produce and supply the good

Question 16

What is cross elasticity?

Answer 16

of demand (or supply), it is the percentage change in the quantity demanded (or supplied) of one good caused by the price change of another good

cross elasticity of demand (supply) = % change in number of units of X demanded (supplied) / % change in price of Y

if the coefficient is positive (the price of product Y goes up causing the demand for product X to go up), the two goods are substitutes

if the coefficient is negative (the price of product Y goes up causing the demand for product X to go down), the two goods are complements

if the coefficient is zero, the goods are unrelated

Question 17

What is income elasticity of demand?

Answer 17

it measures the percentage change in quantity demanded for a product for a given change in income

income elasticity of demand (supply) = % change in number of units of X demanded (supplied) / % change in income

if the income elasticity of demand is positive (demand increases as income increases), the good is a normal good

if the income elasticity of demand is negative (demand decreases as income increases), the good is an inferior good

Question 18

What is inflation?

Answer 18

a sustained increase in the general prices of goods and services; it occurs when prices on average are increasing over time; inflation has an inverse relationship with purchasing power (as the price level rises, the value of money [purchasing power] declines

monetary assets and liabilities are fixed in dollar amounts regardless of changes in specific prices or the general price level; during a period of inflation, entities holding monetary assets will be hurt by inflation and the loss of purchasing power; however, entities holding monetary liabilities will benefit from increasing price levels because the will be repaying debt with inflated currency

alternative investments may be used to effectively hedge against inflation (real estate, precious metals, energy, livestock, agriculture, etc.) as they are nonmonetary