Week 1 - Supply, Demand, and Elasticities

Question 1

Which direction does the demand curve slope?

Answer 1

the demand curve always slopes down and to the right

Question 2

What direction does the supply curve slope?

Answer 2

slopes up and to the right.

Question 3

What is equilibrium?

Answer 3

When the supply curve meets the demand curve

Question 4

What are the two instances where demand increases?

Answer 4

if price goes down and if taxes go down, you get a raise, or any type of income boost)

Question 5

what are the three elasticities?

Answer 5

1. Price elasticity of demand: Percent change in price and in how much people buy
2. Income elasticity: Percent change in income and in how much people buy
3. Cross-price elasticity: Change in price of one product and percent change in amount purchased of a second product

Question 6

What are normal goods?

Answer 6

Any good with positive income elasticity - as income rises people buy more of a good.

luxury purses; organic food

Question 7

What are inferior goods?

Answer 7

Any good with negative income elasticity; When income rises, people buy less of a good

e.g. ramen noodles - don’t need to buy ramen noodles when you make more money.

Question 8

What are the Three Drivers of Elasticity of Demand?

Answer 8

• Availability of close substitutes
• Time
• Price in proportion to budget

Question 9

If cross price elasticity = 0 what does that mean?

Answer 9

The 2 products are completely unrelated

Question 10

if products are substitutes then

Answer 10

the cross price of elasticity of demand will be positive

Question 11

if products are compliments then

Answer 11

the cross price of elasticity of demand will be negative

Question 12

if products are unrelated then

Answer 12

the cross price of elasticity of demand will be zero