AP Micro: Supply and Demand Review

Unit Elasticity

Demand or supply for which the elasticity coefficient is equal to 1; means that the percentage change in the quantity demanded or supplied is equal to the percentage change in price.

Price Elasticity of Supply Formula

Es = % change in quantity supplied of product X / % change in price of product X

Cross Elasticity of Demand Formula

Exy = % change in quantity demanded of product X / % change in price of product Y

TR Formula

TR = P (product price) • Q (quantity demanded and sold)

Which of the following would cause the supply of good X to become more elastic?

The ability to easily reallocate inputs to production of good X

A change in which of the following causes a movement along a given demand curve for a normal good?

The price of the good

Why use percentages rather than absolute amounts in measuring consumer responsiveness?

1) The choice of units will arbitrarily affect our impression of buyer responsiveness. 2) We can correctly compare consumer responsiveness to changes in the prices of different products.

At the current prices of goods X and Y, the quantity demanded of good X is 10 units, and the quantity demanded of good Y is 5 units. The cross-price elasticity of demand between goods X and Y is 0.6. A 10 percent increase in the price of good Y will result in which of the following?

A 6 percent increase in the quantity demanded of good X.

total revenue test

A test to determine elasticity of demand between any two prices: Demand is elastic if total revenue moves in the opposite direction from price; it is inelastic when it moves in the same direction as price; and it is of unitary elasticity when it doesn't change when price changes.

Consider the market for arugula, a normal good. Which of the following changes would result in an increase in both the equilibrium price and the equilibrium quantity of arugula?

An increase in population

Inferior Goods

As income rises, demand for these goods decrease, the income elasticity coefficient is negative.

Which of the following explains why the supply curve is upward sloping?

At a higher price, producers are more able to cover the higher marginal cost associated with increasing production

Price-Elasticity Coefficient Formula

Ed = % change in quantity demanded of product X / % change in price of product X

Expanded Form of the Price-Elasticity Coefficient Formula

Ed = (change in quantity demanded of X / original quantity demanded of X) ÷ (change in price of X / original price of X)

Midpoint Formula for Ed

Ed = [change in quantity / (sum of quantities / 2)] ÷ [change in price / (sum of prices / 2)]

Income Elasticity of Demand Formula

Ei = % change in quantity demanded / % change in income

Which of the following policies would result in an increase in the quantity supplied of a good in a market?

Imposing a binding price floor

A firm estimates that the absolute value of the price elasticity of demand for its signature sandwich is 2. If the firm increases its sandwich price by 10 percent, what will happen to the quantity demanded?

It will decrease by 20 percent

Inelastic Demand

Product or resource demand for which the elasticity coefficient for price is less than 1. This means the resulting percentage change in quantity demanded is less than the percentage change in price.

Perfectly Inelastic Demand

Product or resource demand in which price can be of any amount at a particular quantity of the product or resource demanded; quantity demanded does not respond to a change in price; graphs as a vertical demand curve.

Substitute Goods

Sales of the products are both moving in the same direction and the cross elasticity of demand is positive.

Normal Goods

Superior goods that when more are demanded as income rises. Also are called superior goods when the income-elasticity coefficient is positive

Assume that the market for a good is in equilibrium at a price of $20 and a quantity of 100 units. After the government imposes a $5 per-unit excise tax on the good, the price that buyers pay for the good increases by $3. Which of the following are possible values for the government tax revenue and deadweight loss in the market?

Tax revenue is $300, deadweight loss $100

Suppose the small country of Aronow imports 40,000kg of bananas. The global price of bananas is $0.50 per kg. The government of Aronow collects tariff revenues of $4,000 from banana imports. Which of the following is true?

The consumers in Aronow pay a price of $0.60 per kg of bananas.

An increase in the price of good X causes buyers to want to buy more of good Y. Which of the following explains the resulting change in the market?

The demand curve for good Y will shift to the right because the goods are substitutes.

Proportion of Income

The higher the price of a good relative to consumers' incomes, the greater the price elasticity of demand.

Which of the following will occur as a result of a decrease in the prices of the inputs used to produce a good?

The quantity supplied would increase at each possible price for the good.

Income Elasticity of Demand

The ratio of the percentage change in the quantity demanded of a good to a percentage change in consumer income; measures the responsiveness of consumer purchases to income changes.

Assume that good X is a normal good. If the price of good X increases, what will happen?

The substitution and income effects will both lead to less of good X being purchased.

Total Revenue (TR)

The total number of dollar received by a firm (or firms) from the sale of a product; equal to the total expenditures for the product produced by the firm (or firms); equal to the quantity sold (demanded) multiplied by the price at which it is sold.

Assume that the market for a good is characterized by a downward-sloping demand curve and an upward-sloping supply curve. Suppose that there is an improvement in technology for producing the good. Which of the following would occur?

The total surplus (the sum of consumer and producer surpluses) in the market would increase.

Complementary Goods

When the increase in the price of one decreases the demand for the other and when cross elasticity is negative.

One reason consumers typically increase the quantity of a good they purchase when the price of the good decreases is that

consumers' purchasing power increases

Suppose the price elasticity of supply for gasoline in the short run is estimated to be 0.4. Due to an unexpected surge in the demand for gasoline, the price of gasoline increases by 20 percent. As a result, the quantity supplied of gasoline will

increase by 8 percent

A 10 percent increase in the price of a good results in a 4 percent increase in total revenue. From this information, it can be concluded that the demand over this range of prices

is inelastic

Applications of Price Elasticity of Demand

large crop yields excise taxes decriminalization of illegal drugs minimum wage

Time

product demand is more elastic the longer the time period under consideration

Determinants of Price Elasticity of Demand

substitutability, proportion of income, luxuries vs necessities, time

The market supply curve for a product is derived from the individual firm supply curves by

summing the quantities each producer sells at each possible price

Substitutability

the larger the number of substitute goods that are available, the greater the price elasticity of demand

Luxuries vs. Necessities

the more that a good is considered to be a "luxury" rather than a "necessity," the greater is the price elasticity of demand

Market Period

A period in which producers of a product are unable to change the quantity produced in response to a change in its price and in which there is a perfectly inelastic supply

Short Run

A period of time in which producers are able to change the quantities of some but not all of the resources they employ; a period in which some resources (usually plant) are fixed and some are variable.

Long Run

A period of time long enough to enable producers of a product to change the quantities of all the resources they employ; period in which all resources and costs are variable and no resources or costs are fixed

Which of the following correctly describes the income effect associated with the law of demand?

If the price of a normal good decreases, the purchasing power of a consumer's income increases and therefore consumers will be willing and able to purchase more of the good.

Perfectly Elastic Demand

Product or resource demand in which quantity demanded can be of any amount at a particular product price; graphs as a horizontal demand curve.

Elastic Demand

Product or resource demand whose price elasticity is greater than 1. This means the resulting change in quantity demanded is greater than the percentage change in price.

In which of the following cases would government intervention in a market result in an increase in the quantity sold?

Providing producers of a product with a per unit subsidy

The market for tomatoes is in equilibrium at the price of $10, and quantity of 50 tomatoes. If consumer surplus is $400 and total surplus is $650, what is the producer surplus in the tomato market and why?

The producer surplus is $250, because the total surplus less what consumers receive must go to producers.

price elasticity of demand

The ratio of the percentage change in quantity demanded of a product or resource to the percentage change in its price; a measure of the responsiveness of buyers to a change in the price of a product or resource.

Cross Elasticity of Demand

The ratio of the percentage change in quantity demanded of one good to the percentage change in the price of some other good. A positive coefficient indicate the two products are substitute good; a negative coefficient indicates they are complementary goods.

Price Elasticity of Supply

The ratio of the percentage change in quantity supplied of a product or resource to the percentage change in its price; a measure of the responsiveness of producers to a change in the price of a product or resource.

Which of the following will initially result from an increase in the market demand for a good?

There will be a temporary shortage at the original equilibrium price.

Independent Goods

When the products are at a zero or near-zero cross elasticity.