Week 2

Question 1

Price elasticity of demand

Answer 1

Price elasticity of demand is a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity. The formula for calculating price elasticity of demand is:

Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Question 2

Elastic demand

Answer 2

Question 3

Inelastic demand

Answer 3

Question 4

Inferior good

Answer 4

a type of good for which demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society’s economy improves.

Question 5

Normal good

Answer 5

a good or service that experiences an increase in quantity demanded as the real income of an individual or economy rises. A normal good is defined as having an income elasticity of demand coefficient that is positive but less than one.

Question 6

Luxury good (or upmarket good)

Answer 6

a good for which demand increases more than proportionally as income rises, and is a contrast to a “necessity good”, for which demand increases proportionally less than income.

Question 7

Necessity good

Answer 7

• Goods that we cannot live without and will not likely cut back on even when times are tough, for example food, power, water and gas.
• The more necessary a good is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price.
• Most necessity goods are usually produced by a public utility.

Question 8

Marginal analysis

Answer 8

• As long as marginal costs are smaller thanmarginal benefits, should keep going.
• If marginal benefits become smaller than marginal costs: done too much

Question 9

General maximization principle:

Answer 9

Marginal benefits (revenue) = Marginal costs

Question 10

Long run supply curve

Answer 10

• In the long run all costs should be taken into
  account
• The relevant curve is the average total cost
  curve

Question 11

Short run supply

Answer 11

Question 12

Long run supply

Answer 12

Question 13

Average total cost

Answer 13

Per unit cost that includes all fixed costs and all variable costs.

The average total cost (ATC) curve initially will decline as fixed costs are spread over a larger number of units, but will go up as marginal costs increase due to the law of diminishing returns.

Question 14

Average fixed costs

Answer 14

The average fixed cost (AFC) curve will decline as additional units are produced, and continue to decline.