Module 3: The Economic Marketplace

Question 1

Macroeconomics

Answer 1

How human behavior affects outcomes in markets

Question 2

Microeconomics

Answer 2

How human behavior affects the conduct of more narrowly defined units, including a single individual, household, or business

Question 3

Market

Answer 3

Simply a collection of buyers and sellers meeting or communicating in order to trade goods or services

Question 4

Demand curve

Answer 4

Dictates prices

Question 5

Quantity Demanded

Answer 5

Dictated by price of THAT good/service

–Price goes up, QD goes down

Question 6

Factors that Shift Demand Curves
(WRITEN)
Macro - TWICEG
Micro - WRITEN

Answer 6

• -Wealth… increase, shift right
• -Related goods… if substitute good price goes up, demand goes up, shift right
• -Income… consumer income goes up, demand goes up, shift right
• -Tastes… change in preference
• -Expectations… if consumers expect price to go up, demand goes up, buy NOW
• -Number of buyers.. increase in number of buyers, demand goes up, shift right

Question 7

Factors that Shift Supply Curves

ECOST

Answer 7

• -Expectations… if prices are expected to decrease, sell now
• -Costs… if costs are expected to decline, COGS will decline, profits will increase, supply will increase, shift right
• -Other goods… supply increase
• -Subsidies or Taxes… taxes go down, supply goes up, profit goes up, shift to right
• -Technology… improvement in technology would cause a shift to the right

Question 8

Market Equilibrium

Answer 8

No forces acting to change the current price or quantity
–When the supply and demand curves intersect
(market clearing price)

Question 9

Changes in Equilibrium

Answer 9

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

• -Demand goes up, price goes up
• -Supply goes up, price goes down

Question 10

Government Intervention

Answer 10

• -Price Ceiling: Maximum price established set below the equilibrium price… causing QD > QS
• -Price Floor: Minimum price established set above the equilibrium price… causing QS > QD

Question 11

Elasticity

Answer 11

Measure of how sensitive the demand or supply of a product is to change in price

Question 12

Price Elasticity of Demand

Answer 12

% change in quantity demanded / % change in price

• -NOO (new - old) / old
• -Usually negative

Question 13

Price Elasticity Effect on Revenue

Answer 13

• -Inelasticity (Positive): Increase in price, decrease in quantity, increase in revenue
• -Elasticity (Negative): Increase in price, decrease in quantity, decrease in revenue
• -Unit Elasticity will cancel out

Question 14

Price Elasticity of Supply

Answer 14

% change in quantity supplied / % change in price

Question 15

Prince Inelasticity

Answer 15

Supply < 1.0 … not sensitive

Question 16

Price Elasticity

Answer 16

Supply > 1.0 … Sensitive

Question 17

Factors Affecting Price Elasticity of Supply

Answer 17

-Time required… longer production time leads to lower price elasticity

Question 18

Cross Elasticity

Answer 18

Percentage change in QD or QS of one good caused by the price changes of another good
–% change in number of units of X (Pepsi) demanded
/ % of change in price of Y (Coke)

Question 19

Income Elasticity of Demand

Answer 19

– % change in number of units of X demanded
/ % change in INCOME
–Positive: Demand increases as income increases
–Negative: Demand decreases as income increases