Supply & D

Question 1

Giffen good

Answer 1

Good w a positive price elasticity of demand (D increases w price)

Question 2

Substitutes

Answer 2

Two goods are substitutes if when the price of one good rises, the D for the other good increases

Question 3

Complements

Answer 3

Two goods are complements of when the price of one good rises, D for the other good falls

Question 4

Normal good

Answer 4

If D for this good rises when income increases

Question 5

Inferior good

Answer 5

If D for this good decreases when income increases

Question 6

Price elasticity of D

Answer 6

Measures the sensitivity of the quantity demanded to price , % change in quantity demanded brought by a 1% increase in price

Question 7

Price elasticity of supply

Answer 7

Measures the sensitivity of the quantity supplied to price, it is the % change in quantity supplied brought by a 1% increase in price

Question 8

Cross price elasticity of demand for good I w respect to price of good j

Answer 8

Measures the % change in the quantity of good I demanded w respect to a 1% increase in the price of good j

Question 9

Income elasticity of demand

Answer 9

It is the % change in quantity demanded brought by a 1% increase in income

Question 10

Law of demand

Answer 10

Generally as p goes up, the quantity demanded for goods goes down

Question 11

Law of supply

Answer 11

Generally, the quantity supplied of the good goes up as the price increases

Question 12

Increase in D leads to

Answer 12

a rightward shift

Question 13

Decrease in D leads to

Answer 13

a leftward shift

Question 14

Reasons for larger costs of additional production

Answer 14

• competition on labor market for more workers
• competition for scarce raw materials
• cost of coordinating large firms by hiring managers

Question 15

Increase in supply leads to

Answer 15

a rightward shift

Question 16

Decrease in supply leads to

Answer 16

a leftward shift

Question 17

Market demand functions indicate

Answer 17

total quantity demanded at each price

Question 18

Quantity supplied =

Answer 18

Quantity demanded

Question 19

Qd < Qs

Answer 19

unsold goods, firms need to decrease prices (price is higher than equilibrium price)

Question 20

Qd > Qs

Answer 20

firms can profit by increasing prices and quantity (price was lower than equilibrium)

Question 21

Social surplus

Answer 21

total surplus (is maximised if economy produces at equilibrium quantity)

Question 22

Competitive markets are efficient

Answer 22

each producer/consumer acts in his own interest
output traded is the social surplus maximising one

Question 23

Price elasticity of demand

Answer 23

Usually negative (except for giffen goods)

Question 24

Analysis of price elasticity of demand

Answer 24

If
- e < (-1): demand is elastic
- (-1) < e < 0: demand is inelastic
- e = (-1): demand is unit elastic

Question 25

Price elasticity of supply analysis

Answer 25

- PES > 1: elastic supply - PES < 1: inelastic supply - PES = 1: unitary elastic supply - PES = 0: perfectly inelastic supply - PES = huge value : perfectly elastic supply

Question 26

Cross-price elasticity of demand for good I w respect to price of good j(analysis)

Answer 26

if: - EJ > 0 : a higher price for j increases demand for I (I and J are substitutes) - EJ < 0 : I and J are complements

Question 27

Consumer surplus

Answer 27

total benefit that a consumer makes from buying a certain quantity of the good net of the paid price

Question 28

Consumer surplus

Answer 28

the difference between what a consumer is willing and able to pay for a product, and what the consumer actually ends up paying