econ review unit 2

the cross-price elasticity of demand between good j and k is 3. a 20% decrease in the price of good k will result in a

60% increase in the quantity demanded of good j

shifts in demand

Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations

assume that the demand for bottled water is relatively price elastic. an increase in supply of bottled water will result in which of the following?

a decrease in price, leading to an increase in total revenue

which of the following is most likely to occur when a competitive market adjusts from one equilibrium to another

a decrease in supply and demand will cause the equilibrium quantity to decrease but the equilibrium price to be indeterminate

which of the following statements relating to supply is true

a decrease in the price of a good will lead to a decrease in the quantity supplied of that good

which of the following changes will lead to an increase in the supply of good x

a decrease in the price of energy, a key input to the production of good x

according to the law of demand, an increase in the price of grape juice will result in

a decrease in the quantity of grape juice demanded

unit elastic

a given change in price causes a proportional change in quantity demanded (E=1)

elasticity

a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants

price elasticity of demand

a measure of the sensitivity of demand to changes in price

which of the following would shift the short-run supply curve for strawberries

a strike by all farmworkers

relatively elastic

a term used when the price elasticity of demand is greater than 1 but less than infinity (E=>1)

relatively inelastic

a term used when the price elasticity of demand is less than 1 but greater than zero (E= <1)

PES

measures how sensitive quantity supplied is to a change in price (percent change in quantity supplied/percent change in price)

complements

two goods that are bought and used together

double shift rule

If two curves shift at the same time, either price or quantity will be indeterminate

based on the graph above, the consumer surplus at the market equilibrium price and quantity is shown by which area?

ZMN

the demand curve for a normal good slopes down for which of the following reasons

-an increase in the price of the good induces consumers to purchase substitute products -an increase in the price of goods reduces consumers purchasing power

elastic demand (TR)

-price increase causes TR decrease -price decrease causes TR increase

inelastic demand (TR)

-price increase causes TR to increase -price decrease causes TR to decrease

the law of demand is the result of

-the substitution effect, the income effect, and the law of diminishing marginal utility

following a decrease in the supply of oranges, the price of orange juice increased by 20%, which resulted in a 10% increase in the quantity of apply juice consumed. this implies that cross-elasticity of demand between orange juice and apple juice is

0.5

Change in Demand vs. Change in Quantity Demanded

A change in demand is when the whole curve shifts and a change in quantity demanded is movement along the demand curve due to a change in price. Price Doesn't shift the curve.

shortage

A situation in which quantity demanded is greater than quantity supplied (price is below equilibrium level)

surplus

A situation in which quantity supplied is greater than quantity demanded (price is above its equilibrium level)

normal goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods

Goods for which demand tends to fall when income rises.

5 shifters of supply

Price of resources, number of producers, technology, taxes and subsidies, expectations of future profits

total revenue formula

Price x Quantity

What doesn't shift the Demand or Supply Curve?

Price!!! (Only causes movement along the curve)

ceteris paribus

all other things held constant

if bologna is an inferior good, which of the following must be true?

an increase in consumer income will decrease the demand of bologna

assume the income elasticity of demand for good z equals 5. which of the following is true

an increase in income will lead to a decrease in demand

which of the following will cause the supply curve for shoes to shift to the right

an increase in the number of firms producing shoes

which of the following events will cause the demand curve for hamburgers to shift to the right

an increase in the price of pizza, a substitute for hamburgers

Total surplus

consumer surplus + producer surplus

to determine whether two goods are complements, one would calculate the

cross-price elasticity of demand

assume that the price elasticity of supply for good y is 0.5. if the price of good y decreases by 30%, the quantity supplied of good y will

decrease by 15%

suppose that the demand for vegetables is price elastic. if the price of vegetables increases by 5%, the quantity of vegetables demanded would

decrease by more than 5%

deadweight loss

decrease in total surplus

the graph above show the supply and demand curve for a particular brand of computers. in 1988, 10,000 computers were sold for $1,000 each but in 1989, 9,000 computers were sold for $1,000 each. which of the following changes in supply and demand curves would most likely have caused this change

demand curve: indeterminate supply curve: left

elastic supply characteristics

easier to produce, low barriers to entry (many firms), low cost or generic inputs, easy to switch from producing alternative goods, elasticity coefficient greater than 1

characteristics of inelastic goods

few substitutes, necessities, elasticity coefficient less than 1

perfectly elastic

flat demand curve; consumers are perfectly price sensitive (E=infinity)

substitutes

goods used in place of one another

inelastic supply characteristics

hard to produce, high barriers to entry (few firms), high cost or specialized inputs, hard to switch from producing an alternative good, elasticity coefficient less than 1

income effect

if the price goes down for a product, the purchasing power increases for consumers, allowing them to purchase more

substitution effect

if the price goes up for a product, consumers buy less of that product and more of another substitute product (vice-versa)

a change in which of the following will cause a change in supply of personal computers in the short run

improved technology

which of the following situations best illustrates the law of demand

in the past several months, as the price of compact discs players have decreased, the quantity of compact disc players sold has increased

if the demand for insulin is inelastic, a 5% increase in the price of insulin will

increase the total revenue of insulin producers

To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is

inelastic

characteristics of elastic goods

many substitutes, luxuries, large portion of income, elasticity coefficient greater than 1

elastic coefficient is always _______, these numbers are the absolute value

negative

calculating percent change

new-old/old (x100)

equilibrium

no individual would be better off doing something different

A city transit authority increases the price of subway and bus tickets from $1.25 to $1.50. If the demand for these tickets is price elastic, the number of people riding buses and subways and the city's revenues will most likely change in which of the following ways?

number of people riding: decrease cities revenues: increase

calculating PED

percent change in quantity demanded/percent change in price

Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. an increase in consumers incomes will most likely affect the equilibrium price and quantity of potatoes in which of the following ways?

potatoes: price-decrease, quantity-decrease rice: price-increase, quantity-increase

unit elastic (TR)

price changes and TR remain unchanged

a competitive market is in equilibrium when

price has moved to a level at which the quantity of a good or service demanded equals the quantity of that good or service supplied.

A decrease in raw material prices will change the equilibrium price and quantity in a market in which of the following ways?

price: increase quantity: decrease

perfectly inelastic

quantity does not respond at all to changes in price (E=0)

inelastic demand

quantity is insensitive to a change in price

elastic demand

quantity is sensitive to a change in price

if a 10% increase in the price of a good leads to a 25% decrease in the quantity demanded of the good, demand is

relatively elastic

income elasticity of demand

shows how sensitive a product is to a change in income, shows if a good is normal or inferior (percent change in quantity/percent change in income)

cross-price elasticity of demand

shows how sensitive a product is to a change in price of another good, it shows if two goods are substitutes or complements

consumer surplus in a market for a good exists because

some consumers would be willing to pay more than the equilibrium price of the good

assume that the market for lemonade is perfectly competitive and currently in equilibrium. lemons are key ingredients in lemonade. if the price of lemons decreases, how will the lemonade market be affected?

supply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade

in a perfectly competitive market, a change in which of the following could cause a shift in the supply curve

technology

consumer surplus

the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it (buyers maximum - price)

quantity demanded

the amount of a good or service that a consumer is willing and able to purchase at a given price

price of related goods

the demand curve for one good can be affected by a change in the price of another related good

producer surplus

the difference between the current market price and the cost of production for the firm (price -sellers minimum)

supply

the different quantities of a good that sellers are willing and able to sell (produce) at different prices

demand

the different quantities of goods that consumers are willing and able to buy at different prices

if income elasticity coefficient is negative

the good is inferior

if income elasticity coefficient is positive

the good is normal

if coefficient for cross-price elasticity is negative

the goods are complements

in coefficient for cross-price elasticity is positive

the goods are substitutes

law of diminishing marginal utility

the more you consume of a good or service, the less utility each additional unit gives you

the cross-price elasticity of demand between good x and good z measures the percent change in quantity demanded of good x in response to a percentage change in

the price of good z

equilibrium price

the price that balances quantity supplied and quantity demanded

equilibrium quantity

the quantity bought and sold at the equilibrium price

the price elasticity of demand for a product is 0.5. If the price of the product increases by 20%, which of the following will occur?

the quantity demanded of the good will decrease by 10%

assume that corn is used to produce ethanol. simultaneously, more effective control of pests and weeds occurs in farming. which of the following will definitely occur in the corn market

the quantity of corn will increase

law of supply

there is a direct relationship between price and quantity supplied

law of demand

there is an inverse relationship between price and quantity demanded

price signals

used to describe how prices convey information and help society use resources more efficiently

total revenue test

uses elasticity to show how changes in price will affect total revenue

which of the following best describes the law of demand

when the price of a good increases, the quantity demanded of the good decreases