Price determination in a competitive market ( Micro )

Question 1

Which is demand and which is supply?

Answer 1

Red = Demand
Blue = Supply

Question 2

Where would price and quantity go?

Answer 2

Question 3

What’s a “normal good”?

Answer 3

A good for which demand increases when income increases

Question 4

What’s an “inferior good”?

Answer 4

A good for which demand falls as income increases

Question 5

What’s the equation for price elasticity of demand?

Answer 5

Change in quantity demanded / Change in price

Question 6

What’s the equation for income elasticity of demand?

Answer 6

Change in quantity demanded / Change in income

Question 7

What’s the equation for Cross elasticity of demand?

Answer 7

Change in quantity of good A / Change in price of good B

Question 8

What factors influence the Price elasticity of Demand?

Answer 8

• Substitutability
• Percentage of income
• Time ( demand for many goods is more elastic in long term )

Question 9

What can the income elasticity of demand tell us about a good?

Answer 9

If it’s a negative value, it’s an inferior good, and if positive a normal one. And Normal goods can be further divided into luxury goods when they surpass 1

Question 10

What can the Cross elasticity of demand for a pair of goods tell us about them?

Answer 10

• If it’s negative, they’re complements
• If it’s positive, they’re substitutes
• If it’s 0, they have no relationship

Question 11

What’s the equation for price elasticity of Supply?

Answer 11

Change in quantity supplied / change in price