Session 2

Question 1

Whats the Law of demand?

Answer 1

Tendency for quantity demanded to be higher when the price is lower

Question 2

What are violations of the law of demand?

Answer 2

Giffen goods: Essential goods with upward sloping demand because, with higher prices, one cannot afford better alternatives (very rare) (Rice)

Veblen goods: Goods with upward sloping demand due to increased perceived exclusivity at higher prices (Supreme, Balenciaga)

No good is always veblen or giffen, depends on the context

Question 3

What happens to the demand/supply curve if the price changes?

Answer 3

Movement along the curve

Question 4

What happens to the demand curve if the population gets richer poorer?

Answer 4

Shifts the entire demand curve

Question 5

What happens to the supply curve at technology/trade shocks?

Answer 5

Shifts entire supply curve

Question 6

What are the components of perfect competition?

Answer 6

• All firms in an industry sell an identical good (product homogeneity)
  If Products are not identical: leads to brand loyalty and differentiated pricing (e.g., blue jeans)
• There are many buyers and sellers, each of whom is small relative to the size of the market (atomistic agents)
  If agents are not small: dominant players can influence prices and market conditions (e.g., major airlines)

Question 7

Whats a market?

Answer 7

A setting bringing together potential buyers and sellers (where supply meets demand) (prices are not essential component of markets, but serve as a useful mechanism)

Question 8

Name symptoms of a market disequilibrium if the prices are too low

Answer 8

• Generally shortages
• Queuing of buyers (extra time spent in queue raises the effective price
• Bundling of extras: selling a bundle of primary goods to raise the overall price (VIP package for concerts)
• Secondary markets: organ markets

Question 9

What happens at a market disequilbrium if the prices are to high?

Answer 9

Production surplus

Question 10

What do companies do to finde price elasticities?

Answer 10

• Consumer surveys (Company sends survey to a segment of its customers to gauge how a price change would impact revenues)
• Pricing experiments (Through dynamic pricing, Uber assesses how riders respond to different price points in real-time)

Question 11

Whats the equation for the price elasticity of demand?

Answer 11

Price elasticity of demand= % Change in Quantity demanded / % Change in price

Question 12

What are the values determining if the demand is elastic/inelastic?

Answer 12

• Buyers are responsive = demand is elastic (|εd | ≥ 1)
• Buyers are unresponsive = demand is inelastic (|εd | < 1)

Question 13

Whats the equation to calculate percental change?

Answer 13

(P2-P1/(P2+P1/2))x100

P2 neuer Preis
P1 alter Preis

Question 14

What are the determinants of price elasticity of demand?

Answer 14

Unifying theme is availability of substitutes
1. More competing products = more elastic demand (Example: Demand for coke is elastic due to substitutes like Pepsi)
2. Necessities = less elastic demand (Example: demand for masks during the COVID era was relatively inelastic)
3. Easier consumer search = more elastic demand (Example products on online platforms have more elastic demand due to easy search

Question 15

How do you calculate revenue?

Answer 15

Revenue = Price x Quantity

Question 16

What happens if the demand is elastic and the seller raises the price?

Answer 16

If demand is elastic, the quantity demanded will decline a lot which leads to lower revenue

Question 17

What happens if the demand is inelastic and the seller raises the price?

Answer 17

If demand is inelastic, the quantity demanded will decline by a little which leads to higher revenue

Question 18

Whats cross-price elasticity?

Answer 18

measure of how responsive the demand of one good is to price changes of another good. (measures percent change in quantity demanded that follows from a percent change in the price of another good)

Question 19

Whats the equation of cross-price elasticity of demand?

Answer 19

cross-price elasticity of demand= %Change in quantity demanded/ %change in price of another good

Question 20

What is a Normal good and what is its income elasticity?

Answer 20

• Normal goods: goods for which higher income leads to a higher demand.

o Example: organic food, cars

o Income elasticity is POSITIVE for normal goods: as income rises, demand for these products increases.

Question 21

Whats an inferior good and what is its income elasticity?

Answer 21

• Inferior goods: goods for which higher income leads to a lower demand.

o Example: canned food, second-hand cars

o Income elasticity is NEGATIVE for inferior goods: as income rises, demand for these products decreases.

Question 22

What is the price elasticity of supply?

Answer 22

measure how responsive sellers are to price changes. measures percent change in quantity supplied that follows from percent price change

Question 23

Whats the equation for price elasticity of supply?

Answer 23

Price elasticity of supply = % Change in quantity supplied/ % Change in price

Question 24

What are determinants of the price elasticity of supply?

Answer 24

1. Inventories (a lot of stock) = more elastic supply
2. Easily available variable inputs (different flours for a bakery, elastic, opposite to specialty manufacturing) = more elastic supply
3. Extra capacity (more optional man/engine power, factory running at 50% of capacity has more elastic supply than one running on 100%) = more elastic supply
4. Easy entry and exit (shutting down or taking up operations) = more elastic supply
5. More time = more elastic supply