module 3

Question 1

elasticity

Answer 1

measures responsiveness depending on a certain variable – sensitive to price changes

Question 2

price of elasticity of demand

Answer 2

measures how much quantity demanded responds to changes in price

Question 3

total revenue

Answer 3

amount of money sellers get when they sell a good

Question 4

price effect

Answer 4

increase in price means each unit sells for more leading to an increase in revenue

Question 5

quantity effect

Answer 5

an increase in price can lead to a decrease in quantity demanded thus leading to lower revenue

Question 6

factors for price elasticity of demand

Answer 6

• number of close substitutes
• is it essential?
• how big is the market?
• share of consumer budget
• short/long run demand

Question 7

income elasticity of demand

Answer 7

measures how responsive quantity demand is to changes in consumer income

Question 8

cross-price elasticity demand

Answer 8

measures how responsive quantity good is to the change in price of another good `

Question 9

complement good (CPED)

Answer 9

demand is linked to another goods demand, therefore value is negative

Question 10

substitute good (CPED)

Answer 10

satisfies a similar need therefore increase price of one good leads to an increase in demand for another (positive value)

Question 11

price elasticity of supply

Answer 11

shows how responsive sellers are to price changes

Question 12

law of supply

Answer 12

tells us supply curves always slope up because increase in price equals to price in quantity

Question 13

factors for price elasticity of supply

Answer 13

• how easy it is to access inputs
• time horizons (longer time horizons have more elasticity)

Question 14

price ceiling

Answer 14

maximum price a good can be sold at

Question 15

when is price ceiling binding

Answer 15

price ceiling below equilibrium price

Question 16

when is price ceiling NOT binding

Answer 16

price ceiling above equilibrium price

Question 17

what is the result of price ceiling

Answer 17

shortages because there is a decrease in supply and increase in demand

Question 18

shortage complications

Answer 18

1. long line-ups
2. decline in quality (bcs they cannot increase price because of price ceiling)
3. discrimination (sellers can pick and chose their customers)

Question 19

price floors

Answer 19

minimum price a good can be sold at

Question 20

when is price floor binding

Answer 20

price floor has to be above equilibrium price

Question 21

when is price floor NOT binding

Answer 21

when price floor is below equilibrium price

Question 22

problems with setting floor price

Answer 22

1. black markets (sold illegally)
2. prevents mutually beneficial trades from happening in competitive market

Question 23

elasticity demand

Answer 23

how consumers react to price changes

Question 24

income elasticity

Answer 24

how demand changes when consumer income shifts

Question 25

inelastic

Answer 25

not sensitive to price changes