Topic 2: Markets and Trade exercises Flashcards
the percentage change in the quantity demanded in
response to a percentage change in the price of a good.
price
elasticity of demand,
the increase in firms’ production cost per unit increase
in output of a product.
the marginal
cost of production
Suppose the Wall Street Journal reports that consumer incomes are
expected to rise by about 2.5 percent over the next year, and the
number of individuals over 25 years of age will reach an all-time high
by the end of the year.
Use the model of supply & demand to predict how these changes will
affect car rental agencies like Avis, Hertz, and National.
Demand for rental cars increases because of rise in consumer income (rental cars are normal goods). The demand curve would shift to the right because more individuals are making more and can drive. Supply curve may not change. Equilbirum price and quantity increase
a good that experiences an increase in its demand due to a rise in consumers’ income
normal good
Suppose you are the manager of a chain of computer stores. You have
just learned that Congress has passed a two-pronged program
designed to further enhance the U.S. computer industry’s position in
the global economy. The legislation provides increased funding for
computer education in primary and secondary schools, as well as tax
breaks for firms that develop computer software.
As a result of this legislation, what do you predict will happen to the
equilibrium price and quantity of software?
Equilibrium quantity will increase
equilirbium price may or may not change
more funding for computer education in primary and secondary schools will increase demand for computer software
reduction in taxes on software manufacturers will lead to an increase in the supply of software but not necessarily an increase in equilibrium price
Think about a dynamic version of the demand-supply model.
Specifically, assume the market for electric vehicles is at an
equilibrium. Then, the demand curve moves to the right due to an
increase in the price of gasoline. What does this imply for:
a. Existing electric vehicles companies’ short-run profits?
b. The number of firms and the production quantity in the market in
the long-run?
c. Consumer welfare in the long-run?
a. EV companies’ profits will increase because the demand increase leads to a higher equilibrium price.
b. The higher profits in the EV sector will attract new firms (recall: profits are a signal where resources are most valued by society). Thus, the production quantity goes up.
c. Consumer welfare increases. The reason is that the increased number of firms in the sector also shifts the supply curve to the right, bringing down the price for EVs to the original level. So, more EVs are traded at the same price, which means consumer surplus increases.
Use supply and demand curves to show how the following changes
affect the equilibrium price and quantity in the breakfast cereal
market:
a. The price of muffins rises, assuming muffins and breakfast
cereals are substitutes.
b. The price of wheat, an input to cereal production, rises.
c. Consumers expect that cereal prices will be higher in the future.
d. There is a change in technology that makes production less
expensive.
e. New medical reports indicate that eating breakfast is less
important than had previously been thought.
a. Demand shifts right (substitutes) -> Equilibrium price and quantity increase.
b. Supply shifts left (price of input) -> Equilibrium price increases, quantity decreases.
c. Demand shifts right (expectations, people buy for storage) -> Equilibrium price and quantity increase
d. Supply shifts right (technology) -> Equilibrium price decreases, quantity increases.
e. Demand shifts left (preferences) -> Equilibrium price and quantity decrease.
