ECON 102-Exam 1
wage elasticity of labor supply
% change in hours worked divided by % change in wages
Elasticity of demand evaluation
-elasticity of demand is always negative but we use it in its absolute value form (make it positive) I Ed I <1 =demand curve is inelastic I Ed I >1 =demand curve is elastic I Ed I =1 =demand curve is unit elastic
If the price of a good/service increases by 5%, the total revenue spent on which of the following good/service would probably decrease? a. Air travel to Barcelona b. The demand for gasoline will shift to the right c. Salt d. Prescription medicine for diabetes
Air travel to Barcelona
tax burden
falls more heavily on the side of the market that is less elastic
opportunity cost
(Aka. Cost) the most desirable alternative given up as the result of a decision *must KNOW the person's second choice in order to know what the opportunity cost is
Elasticity
A measure of how much one economic variable responds to changes in another economic variable.
demand
Consumer willingness and ability to buy products REGARDLESS OF PRICE
Surpluses and shortages are a _________ of _________.
Misallocation of resources
The greater the number of substitutes available, the a. More elastic demand b. Less elastic demand c. More inelastic demand d. Less the impact on quantity demanded to a change in price
More elastic demand
Television sets: growth hormones are scientifically shown to increase vigor and quality of life without significant side effects. Advances in manufacturing these hormones is nearly cost less -graph -P's & Q's
No effect
What kind of elasticity does a supply curve have if its slope is -.16?
No enough info
Based on the following statement what kind of elasticity does the supply curve have? -the demand curve has a slope of -0.16
Not enough information
T/F: if supply is perfectly inelastic, shifts in demand have no effect on quantity.
True
income effect
With a fixed income, if the price decreases then a person can buy more of it
If there is a surplus of a produce, its price: a. Is above equilibrium price b. Is below equilibrium price c. Will rise in the near future d. Is in equilibrium
a. Is above equilibrium price
If there is a shortage of product X, and the price is free to change: a. Price of product will rise b. Price of product will decline c. Fewer resources will be allocated to the production of this good d. The supply curve will shift to the left and the demand curve to the right, eliminating the shortage
a. Price of product will rise
If technology increases then: a. Supply curve shifts right b. Supply curve shifts left c. Demand curve shifts right d. Demand curve shifts left
a. Supply curve shifts right
Ceteris Paribus
all other things held constant
When a market is in equilibrium, which of the following is true? a. Quantity supplied exceeds quantity demanded b. Quantity supplied is less tan quantity demanded c. Quantity supplied is equal to quantity demanded
c. Quantity supplied is equal to quantity demanded
A shortage occurs whenever: a. The quantity supplied is greater than quantity demanded b. The price is above the equilibrium quantity c. The quantity supplied is less than the quantity demanded
c. The quantity supplied is less than the quantity demanded
unit elastic
change in price causes a proportional change in quantity demanded
Which of the following will cause a rightward shift in the supply curve for tobacco? a. A fall in the number of tobacco farmers in the market b. An increase in taxed on tobacco c. Removal of government subsidies to tobacco farmers d. An improvement in the technology used in the production of tobacco
d. An improvement in the technology used in the production of tobacco
Shortages
quantity demanded is greater than quantity supplied -puts pressure on market to drive price up
marginal benefit
the extra benefit of adding one unit
cross price elasticity
the percentage change in demand for product A that occurs in response to a percentage change in price of product B
Supply and demand is perfectly elastic for which good? a. Plain printing paper b. Painting by Picasso c. Salt d. Gasoline
Plain printing paper
A constant unitary supply curve has a ______ slope.
Positive
Constant unitary supply curve has a _____ slope.
Positive
Positive vs. Normative Economics
Positive: -objective and fact based -can be proven right or wrong Normative: -opinion and judgment based -can't be proven right or wrong -try to determine If a situation is desirable
Price elasticity of demand is a measure of how responsive a change in quantity demanded is to a change in _________. a. Price b. Consumer preference c. Supply d. Interest rate
Price
In a competitive market, the price of the product is: a. Independently set by each competing seller b. Set by the market leader and then copied by other sellers c. Jointly set after a meeting of all sellers in the market d. Set by the market supply and demand
d. Set by the market supply and demand
Law of Supply
other things equal, the quantity supplied of a good increases when the price of the good increases, because suppliers make larger profits this way
Trade-off
the act of giving up one benefit in order to gain another, greater benefit
quantity supplied
the amount a supplier is willing and able to supply at a certain price
quantity demanded
the amount of a good that buyers are willing and able to purchase (depending upon price) X-AXIS
marginal cost
the cost of producing one more unit of a good
How is change in quantity supplied represented on a curve?
"change in quantity supplied" is shown on the graph as a movement from one point on a supply curve to another point on the same supply curve. ... At each point on the second supply curve, producers are willing/able to sell more wine. This reflects an increase in supply.
Table Quantity demanded A. 15 b. 13 c. 6 d. 3 Price of pack of water bottles A. 1.00 b. 1.50 c. 2.00 d. 2.50 Quantity Supplied A. 8 b. 13 c. 16 d. 19 What is the equilibrium price? What is the equilibrium quantity?
$1.50 13
Price increases from $5 to $7. Total revenue at $5 with quantity demanded of 120 equals? Total revenue at $7 with quantity demanded of 100 equals? Ed=? how many substitutes do each have?
$600 $700 Ed= 0.4618 (few substitutes)
Price increases from $13 to $15. Total revenue at $13 with quantity demanded of 50 equals? Total revenue at $15 with quantity demanded of 30 equals? Ed=? how many substitutes do each have?
$650 $450 Ed= 2.54 (a lot of substitutes)
The price elasticity of demand for the product is 1.3. A percentage change in price is 14%. The initial quantity of product is 310 units. Calculate the new quantity of product.
%change in Q= 14 * 1.30= 18.20 X-310/ (X+310)/2 *100= 18.20 X= 372 units
Calculate Income Elasticity and explain results. Data: Women's apparel: 2017- (117.056) 2018- (183.164) Men's apparel: 2017- (100.034) 2018- (103.204) Income (median) individuals: 2017- ($33,334) 2018- ($34,317) households: 2017- ($63,761) 2018- ($64,324)
%change quantity women: 183.164 - 117.056/ (183.164 - 117.056)/2 *100= 44% men: 103.204 - 100.034/ (103.204 + 100.034)/2 *100= 3.1% %change income individuals: 34,317 - 33,334/ (34,317 + 33,334)/2 *100= 2.91% households: 64,324 - 63,761/ 64,324 + 63,761)/2 *100= 0.879% women: %change Q/%change I= 44/2.91= 15 or 44/.869= 50 men: 3.1/ 2.91= 1.07 or 3.1/.879= 3.53 women have a bigger % change both are normal goods because they are positive
tax incidence
*Division of tax between buyer and seller. manner in which the tax burden is divided between buyers and sellers. The tax incidence depends on the relative price elasticity of supply and demand.
Given a scenario determine shifts in supply, demand or shifts in both supply curve and demand curve and how the shifts change equilibrium quantity and equilibrium price
*draw out a graph
Calculate shortages and surpluses
*prices above equilibrium= Surplus *prices below equilibrium= shortages
A change in demand will result only in a change in ________.
*quantity supplied not supply Be careful to know if the event (situation) is a cause of change in demand and NOT supply.
A products price in the market changes from $55 to $79. The absolute value of the elasticity of demand is 0.7. What is the percentage change in the quantity demanded? Use the midpoint formula in your calculations. Note that price elasticities of demand are always negative, by convention, we always talk about elasticities as positive numbers. If there is a decrease in the quantity demanded, enter your answer as a negative.
-25%
If the price of oil increases by 10% and over a period of several years, the quantity demanded falls by 5%, then the long run elasticity for oil is;
-5%/-10%= 0.5
price pressure? equilibrium price?
-Brings market to equilibrium -quantity demanded=quantity supplied
Perfectly elastic
-Change in price results in a loss of quantity In this special case, the demand curve is horizontal, meaning consumers have an instantaneous and infinite response to a change in price -unlimited substitutes
Elasticity & substitute relationship
-Demand is elastic if good has a lot of substitutes -demand is inelastic if good has few substitutes ex. Gasoline is inelastic because it has few substitutes, however QT, Caseys, Kum & Go are elastic because they all have substitutes
sunk costs
-IGNORE THEM -a cost that has already been committed and cannot be recovered -costs that you would incur regardless of what the decision is -costs that happened in the past (all about the future!)
Decision rule for marginal benefits vs. marginal cost
-If marginal benefit is greater than marginal cost= do more -If marginal benefit is less than marginal cost= do less -If marginal benefit is equal to marginal cost= do the same (*optimal level*)
slope and elasticity relationship
-Slope is not the same as elasticity (only an indicator!) -slope= rise/run -elastic= flat slope -inelastic= steep slope
Determine how much of the tax the supplier paid and how much tax the consumer paid
-The tax incidence on the consumers is given by the difference between the price paid Pc and the initial equilibrium price Pe. -The tax incidence on the sellers is given by the difference between the initial equilibrium price Pe and the price they receive after the tax is introduced Pp.
what factors would cause the quantity supplied to change?
-change in price inputs (increase in price input, decrease in supply) (decrease in price input, increase supply) -change in technology (increase technology, increase supply) -change in natural environment (drought, flow, fire, etc, decrease supply) -change in interest rate costs (higher interest rate cost more to borrow, decrease supply) (lower interest rate cost less to borrow, increase supply) -change in expectations (expect prices to increase in future, decrease supply) (expect prices to decrease in future, increase supply) (pessimistic about future profits, decrease supply) (optimistic about future profits, increase supply)
perfectly inelastic
-change in prices does not result in any change in quantity -price has no effect on quantity -think of prescription drugs -no substitutes
What factors would cause the supply curve to shift? Key: know what factors shift the supply curve, and it is not price of the item
-natural events -technology -cost of production -product tax -# of firms -Price of item itself WILL NOT shift supply curve
What factors cause quantity demanded to change? What factors would cause the demand curve to shift? Key: know what factors shift demand curve, and it is NOT the price of the item
-price of related good (for complement goods; price of related good increases, demand decreases or price of related good decreases, demand increases) (for substitute goods; price of related good increases, demand increases or price of related good decreases, demand decreases) -consumers income level (inferior good demand; income increase, demand decreases or income decreases, demand increases) (normal good demand; income increases, demand increases or income decreases, demand decreases) (no change in neutral good's demand) -Taste or preference (good becomes a "must have", increase demand) (good falls out of favor, decrease demand) -demographics (baby boomer numbers increase, increase in demand for retirement homes) (increase in number of buyers, increase demand) (decrease in number of buyers, decrease demand) -availability of credit (interest rate decreases, increase demand) (interest rate increases, decrease demand) -changes in expectations (expect prices to increase in future, increase demand) (expect prices to decrease in future, decrease demand) (pessimistic about future income, decrease demand) (optimistic about future income, increase demand)
A change in supply will result only in a change in ____.
-quantity demanded not demand Be careful to know if the event (situation) is a cause of change in supply and NOT demand.
how is an increase in demand represented on a curve? how is an decrease in demand represented on a curve?
-shifts right (and up) -shifts left (and down)
Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is 2. Then the discount would increase sales (quantity demanded) by _____%.
50
Determinants of Elasticity How to predict elasticity based on determinants? In a scenario, be able to determine if a good is elastic or inelastic using the determinants
-substitutes (more substitutes= Elastic) -necessity (the more necessary one regards an item the harder it is to find substitutes= inelastic) -luxury (the less necessary one regards an item the easier it is to find substitutes= elastic) -proportion of budget (income) (the larger percentage of budget spent on an item (I.e. vacation, tv)= elastic) (the smaller percentage of budget spent on an item (I.e.candy bar)= inelastic) -availability of productive inputs (limited amount of resources or seasonal supply= inelastic) (readily available=elastic) -Time frame (long run, time to react= elastic) (short run, no time to react= inelastic) -marketplace competition (competitive marketplaces= elastic demand) (when only one or few suppliers can provide a product= inelastic demand)
At the initial price of $10 the quantity demanded is 100, when the price rises to $20 the quantity demanded falls to 90. What is elasticity?
0.158 <1 = inelastic Answer: inelastic
The elasticity of demand for eggs has been estimated to be 0.1. If the egg producers raised their prices by 10%, what will happen to their total revenue?
0.1= inelastic demand curve = P ^ R ^ Answer: Increase
When a product's price changes from $26 to $10 and its quantity demanded changes from 100 to 200 units, the price elasticity of demand equals. Use the absolute value and calculate with mid point formula.
0.75
Market Curve Steps
1.) find initial equilibrium 2.) identify if event effected the supply or demand 3.) in what direction should that cause the curve to move (draw new curve) 4.) compare old equilibrium to new (price up or down?) (quantity demanded up or down?) -increase in demand will only change quantity supplied not supply itself -increase in supply will only change quantity demanded not demand itself
If the quantity demanded rises by 60% and the price falls by 20%, the price elasticity of demand is:
3
A country is about to let refugees in, but current residents are strongly against it. They are afraid that the wages of low-skilled workers will fall if there is an increase in the available workforce. It is estimated that the country can let in 75,000 refugees, but only 70% of them are expected to look for a job. The wage elasticity of labor demand is -0.5. In the country's labor market, there are 723,750 low skilled workers. Calculate the expected wage drop as a percentage.
75,000 * 70%= 52,500 refugees looking for jobs increase In labor supply: 52,500/ (723,750 + 723,750 + 52,500)/2 *100= 7.0% To provide every willing refugee with a job, the demand for labor should increase by 7.0% Wage elasticity of labor demanded= %change in quantity of labor demanded/ %change in wage %change in wage= %change in quantity of labor demanded/ wage elasticity of labor demanded = 7.0%/ -0.5= -14.0%
In a scenario determine if supply or demand changes and in which direction, what factor caused the change. For example: cost of product for supply, taste for demand
?
Suppose the market (equilibrium) price of apples rises from $2 to $3 per pound, and the overall market clearing (equilibrium) output increases from 1 to 2 million pounds. How can we explain the increase in the equilibrium price and increase in market (equilibrium) output? a. Demand increased and supply remained unchanged B. Supply increased and demand remained unchanged c. Supply decreases and demand decreased d. None of the choices are correct
?
Income Elasticity
A measure of how sensitive consumption of good X is to a change in a consumer's income
invisible hand
A phrase coined by Adam Smith to describe the process that turns self-directed gain into social and economic benefits for all (a self-regulated market place)
Scarcity
A situation in which unlimited wants exceed the limited resources available to fulfill those wants
If the price elasticity of demand is 3, then if quantity demanded increased by 12% there is ______. a. A 4% decrease in price b. A 3% decrease In price c. A 3% increase in price d. A 4% increase in price
A. A 4% decrease In price
A grocery store is giving away a free box of cereal with every purchase of a gallon of milk. How does this event affect the supply curve or demand curve for the dairy industry? a. The demand curve for milk shifts to the right B. The demand curve for milk shifts to the left c. The supply curve for milk shifts left d. The supply curve for milk shifts to the right
A. The demand curve for milk shifts right
The equilibrium price of a good is $15.10. Demand for the good is less elastic than supply. Suppose the government introduces a tax on this good; as a result, the tax burden on consumers is $6.20, and the tax burden on producers is $4.50. Calculate the price paid by consumers after the introduction of this tax.
Add price burden of consumers and equilibrium tax of good to find tax paid by consumers 15.10+6.20= $21.30
How is a change in quantity demanded represented on a curve?
An increase in quantity demanded is caused by a decrease in the price of the product (and vice versa). A demand curve illustrates the quantity demanded and any price offered on the market. A change in quantity demanded is represented as a movement along a demand curve.
What's wrong with this sentence? As income rises, demand for normal good rises; as income falls, demand for an inferior good falls.
As income falls, demand for an inferior Good *rises*.
What's wrong with this sentence? As prices rise, supply rises; as prices fall, supply falls.
As the price rise, *quantity supplied* rises; as prices fall *quantity supplied* falls.
Normal good
Associated with higher income (income ^ demand ^)
Inferior good
Associated with lower income (income v demand ^)
Law of Demand
Assuming other things are equal, the quantity demand increases when price decreases, and vise versa (*inverse relationship*)
According to the law of demand, what is the relationship between price and quantity demanded? a. Direct b. Inverse c. No relationship
B. Inverse
Income perspective
Based on a person's income their perspective of what a "normal good" is will alter -therefore we can't know what happens to demand without knowing the type of good -Bill Gates will have a different income perspective than me
Why is the demand curve downward sloping?
Because the law of demand states there is an inverse relationship between price and quantity demanded because of the substitute and income effects
Supply/ and or demand is perfectly elastic for which item? a. Paintings by picasso b. Tickets to a football game c. Books d. Salt
Books
Suppose the demand curve shows a price change from $1.50 to $3 per liter of fresh water. What is the percentage change in quantity demanded? a. The % change in quantity demanded is 66.67% because demand has constant unitary elasticity B. The % change in quantity demanded is 50% because demand has constant unitary elasticity C. The % change in quantity demanded is 0% because demand is perfectly inelastic D.The % change in quantity demanded is 0% because demand is perfectly elastic
C. The % change in quantity demanded is 0% because demand is perfectly inelastic
When the demand curve shifts to the right and the supply curve is held constant; a. The equilibrium price and quantity decrease b. The equilibrium price increases and equilibrium quantity decreases c. The equilibrium price and quantity increase d. You see a movement along the demand curve
C. The equilibrium price and quantity increase
If the cross elasticity of demand for good A with respect to good B is -4.4, then good a could be _______ and good B ________. a. Camera; film b. Beef; chicken c. University of Texas; University of Oklahoma d. Miller beer; Schilitiz beer
Camera; film
if demand is relatively inelastic, and supply is relatively elastic, who pays more of the tax (buyers or sellers)?
Consumers bear a majority of the tax burden
The cross price elasticity of demand is -0.3 and the change in the price of oranges is 5%. Determine what will happen to the demand for apples.
Cross price elasticity of demand= %change in Qd of good A/ %change in price of good B -0.3= %change in Qd of Good A/ 5= -1.5 *so there is a 1.5% decrease in demand
A change in which of the following will cause a change in the quantity supplied of coffee? a. The technology or production process of making coffee b. Anticipation of a change in the price of coffee c. The wages of coffee bean pickers d. Price of coffee
D. Price of coffee
In the market for breakfast cereal, the market is currently in equilibrium. Suddenly there is a storm that destroys the wheat that farmers head been growing for the cereal manufacturer. What will happen to the cereal market after the storm? a. Demand will increase b. Demand will decrease c. Supply will increase d. Supply will decrease
D. Supply will decrease
An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the: A. demand curve for cigarettes rightward. B. demand curve for cigarettes leftward. C. supply curve for cigarettes rightward. D. supply curve for cigarettes leftward.
D. supply curve for cigarettes leftward.
Candy bars: scientists learn chocolate makes children hyperactive -graph -P's & Q's
Demand decreases because consumer taste decreased for product moving demand curve left price decreases and quantity demanded decreases
Yachts (normal good): your stock dividends falls by 20% -graph -P's & Q's
Demand decreases because incomes decrease and its a normal good moving demand curve left price decreases and quantity demanded decreases
Movies (normal good): most children that receive an allowance increases -graph -P's & Q's
Demand increases because income increases causing demand for a normal good to increase moving the demand curve right price increases and quantity demanded increases
Watermelon: the cost to irrigate a field goes up and it is summer -graph -P's & Q's
Demand increases because of seasonal taste increase and supply decreases because cost of production increases moving the demand curve right and supply curve left and up magnitude charges: P^ Q^ P^ Qv = P^ Q? (Can't determine)
Umbrellas: heavy rain is forecasted -graph -P's & Q's
Demand increases because of taste and a need for product moving demand curve right price increases and quantity demanded increases
Swimsuits: summer vacation begins for school children. -graph -P's & Q's
Demand increases because taste changes and kids want new swimsuits for summer moving demand curve right price increases and quantity demanded increases
Inelastic
Describes demand that is not very sensitive to a change in price
As the price of bananas fell from $0.60 to $0.40 a pound, the quantity demanded rose from 300 pounds of bananas bought to 500 pounds. In this example, demand is (use the mid point formula). a. Elastic b. Inelastic c. Unit elastic d. Perfectly elastic
Elastic
The larger the elasticity coefficient the more _____ the demand is and the ______ the demand curve is.
Elastic and flatter
Relationship between elasticity of demand and revenue Predict change in total revenue based on price elasticity of demand coefficient (elasticity value) ( i.e. if coefficient is elastic and the firm increases their price what will happen to TR). Be able to do this via scenarios
I Ed I <1 =demand curve is inelastic (P&R move together) I Ed I >1 =demand curve is elastic (P&R move opposite) I Ed I =1 =demand curve is unit elastic (P move but R stays the same)
Substitute effect
If 2 goods are equally as good then the lower price one will be more demanded
If the cost to produce a good increases, can the company pass the cost increase along to the consumer in a higher price
If the product is elastic then no, if its inelastic then yes
What's wrong with this sentence? If the wages paid automobile manufacturing workers increases the supply of automobiles will increase.
If the wages paid automobile manufacturing workers increases the supply of automobiles will *decrease*
Substitute
In place of *Increase in price of good A causes an increase in demand for good B
The average annual income rises from $20,000 to $30,000, and the quantity of bread consumed in a year by the average person falls from 30 to 25 loaves. Calculate the income elasticity of bread consumers.
Income elasticity of demand= %change in quantity demanded/ %change income % change in quantity= -18.18 %change in income= 40.00 -18.18/ 40= -0.45
US cars: the US imposes a tariff on Japanese car imports and US auto workers get a raise -graph -P's & Q's
Increase in demand because substitute demand decreases and demand increases because income increases because its a normal good and supply decreases because cost of production increases Moving supply curve left and up and demand curve right P^ Q^ P^ Qv =P^ Q?
Nita is a devoted coke consumer, whereas Becky can drink either coke or Pepsi products. Nita's demand for coke is relatively more _____, while Becky's demand will be relatively more _______. a. Elastic; inelastic b. Inelastic; elastic c. Unrelated to price; elastic D. Unit elastic; inelastic
Inelastic; elastic
If income increase by 12% and the quantity demanded of a good decreases by 14% the good is a(n) __________ good.
Inferior
Spam: your income drops by 40% -graph -P's & Q's
Inferior good so a a decrease in income leads to an increase in demand Moving demand curve right price increases and quantity demanded increases
Based on the following statement what kind of elasticity does the supply curve have? -the demand curve when the price of dole pineapples increases by 15%
Infinite elasticity
Imagine you are a bank manager. Currently your bank holds $7 million in deposits at a 4% interest rate. However, you need to increase the total deposits to $9 million. The interest rate elasticity of savings is 1.90. What interest rate should you offer to depositors to obtain the required amount, all other things being equal?
Interest rate elasticity of savings= %change in quantity of savings/ %change interest rate %change in quantity of savings: 9-7/ (9+7)/2 *100= 25.00% 25.00%/ %change interest rate= 1.90 X= 13.16% New interest rate=x x-4%/ (x+4)/2= 13.16% x/ new interest rate= 4.56%
In which time period is demand most elastic? a. Long run b. Short run c. Immediate run d. Elasticity is the same for all time periods
Long run
Based on the income elasticity coefficient, determine if the good is a normal or inferior good, and if the good is a luxury or necessity. How can the coefficient sign indicate a normal or inferior good?
Normal goods have a positive income elasticity coefficient since increases in incomes cause increases in the demand for normal goods. Inferior goods have a negative income elasticity coefficient.
Demand is unitary elastic, what happens to the total revenue if the price rises by 5%? A. It increases by 5% B. It decreases by 5% C. It decreases by less than 5% D. Nothing
Nothing
Hamburger: price of hamburger increases by $1 a pound -graph -P's & Q's
Only changes quantity demanded and supplied moving equilibrium point on demand and supply curve up by $1 ?
Given a current price, does a shortage or surplus occur? how does the shortage or surplus then bring the market back into equilibrium?
Price above equilibrium= surplus below= shortage price pressure to get the equilibrium price where quantity demanded= quantity supplied occurs if surplus the price is driven down If shortage price is driven up
A products price in the market changes from $44 to $80. The absolute value of the elasticity of demand is 0.4. What is the percentage change in the quantity demanded? Use the midpoint method in your calculations.
Price elasticity of demand= %change in price/ %change in quantity %change in price: 44-80/ (44+80)/2 *100= 58% -.4= 58/x x or %change in quantity= -23%
Oreo cookies: the price of milk goes up -graph -P's & Q's
Price of complement increases so demand for cookies deceases moving demand curve left price decreases and quantity demanded decreases
Jelly Beans: you are making an Easter basket and find that the price of jelly beans has increased by 0.50 cents -graph -P's & Q's
Price of good itself changed, increasing the equilibrium point for quantity demanded and supplied by 0.50
What's wrong with this sentence? Quantity demanded is greater than supply when there is a shortage.
Quantity demanded is greater than quantity supplied when there is a shortage.
In the long run does quantity or price adjust easier?
Quantity does, bc firms can adjust production in the long run by building new factories or closing existing ones. However they are limited in the short run by fixed costs
The local National Hockey League (NHL) team decides to lower tickets in order to attract more fans. They are hoping that the: a. Price decrease matters more than the quantity increase to total revenue b. Quantity increase matter more than the price decrease to total revenue c. Elasticity of demand is inelastic d. Price elasticity of demand is unit elastic
Quantity increase matters more than price decrease to total revenue
Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug. If the elasticity of demand for your company's product at the current price of 0.6, what do you advise the company to do? a. Keep the price the same b. Lower the price c. Raise the price
Raise the price
cost-benefit analysis
a decision-making process in which you compare what you will sacrifice and gain by a specific action
Calculate slope of a demand curve
Since slope is defined as the change in the variable on the y-axis divided by the change in the variable on the x-axis, the slope of the demand curve equals the change in price divided by the change in quantity. To calculate the slope of a demand curve, take two points on the curve.
Calculate the slope of a supply curve
Since slope is defined as the change in the variable on the y-axis divided by the change in the variable on the x-axis, the slope of the supply curve equals the change in price divided by the change in quantity. Between the two points labeled above, the slope is (6-4)/(6-3), or 2/3.
For which of the following goods would you expect demand to be the most responsive to a rise in price? a. Electricity b. Hospital emergency room visits c. Spaghetti d. Water for a shower
Spaghetti
If the cross elasticity of demand between chicken and fish is 0.8, the chicken and fish are: A. Complements B. Substitute c. Not related d. Normal goods
Substitute
Sign is more important than coefficient in cross price elasticity *positive=? *negative=?
Substitutes complements
The equilibrium price of a good is $15.20. Demand for the good is more elastic than supply. Suppose the government introduces a tax on this good; as a result, the tax burden on consumers is $4.80, and the tax burden on producers is $6.50. Calculate the price received by producers after the introduction of this tax.
Subtract price burden on producers by equilibrium tax of good to find tax burden on producers 15.20-6.50= $8.70
if demand is relatively elastic, and supply is relatively inelastic, who pays more of the tax (buyers or sellers)?
Suppliers bear a majority of the tax burden
How is a decrease in supply represented on a curve?
Supply curve shifts to the left (and up)
How is an increase in supply represented on a curve?
Supply curve shifts to the right (and down)
Baseball Gloves: the price of leather increases. -graph -P's & Q's
Supply decreases because cost of production increases (moving supply curve left and up) price increases and quantity demanded decreases
T-shirts: cost of cotton increases
Supply decreases because cost of production increases Moving supply cure left and up price increases and quantity demanded decreases
Wine: the average wage of grape workers increases by 10% and wine is found to be bad for your heart -graph -P's & Q's
Supply decreases because cost of production increases and demand decreases because a decrease in taste Moving supply curve left and up and demand curve left P^ Qv Pv Qv =P? Qv
Wheat: drought destroys much of the crop -graph -P's & Q's
Supply decreases due to environmental factors and a decrease in number of suppliers moving The supply curve left and up price increases and quantity demanded decreases
Oranges: There is an early frost which destroys much fo the crop and eating four oranges a day will reduce your changes of having cancer by 70% -graph -P's & Q's
Supply decreases due to environmental factors and decrease in suppliers and demand increases because taste has increased moving supply curve left and up and demand curve right P^ Qv P^ Q^ =P^ Q?
Fireworks: manufactures find a more productive way to produce fireworks -graph -P's & Q's
Supply increases because cost of production decreases moving the supply curve right and down price decreases and quantity demanded increases
Skateboards: more businesses decide to produce skateboards -graph -P's & Q's
Supply increases because number of suppliers increases Moving supply curve right and down price decreases and quantity demanded increases
When firms want to sell more than consumers want to buy, a ______ occurs.
Surplus
Ed= 0.4618 $5 to $7 120 units to 100 units TR $600 to $700 Graph and explain the total revenue decrease or increase
TR= +100 increased
Ed= 2.54 $13 to $15 50 units to 30 units TR $650 to $450 Graph and explain the total revenue decrease or increase
TR= -200 decreased
What's wrong with this sentence? The demand for donuts will increase when the price of donuts decreases and the quantity demanded of cinnamon rolls will increase (assume donuts and cinnamon rolls are substitutes)
The *quantity demanded* for donuts will increase when the price of donuts decrease and the *demand* of cinnamon rolls will *decrease*
Supply
The amount of goods available
With the high price of gas some states are considering placing a tax on oil companies for each gallon of gas they sell. If passed, the state statutes will determine: a. The consumer will pay the tax if price elasticity of demand is elastic b. The producer if the price elasticity of supply is elastic c. The consumer will pay the tax if the price elasticity of demand is inelastic d. You need more information to answer this question
The consumer will pay the tax if the price elasticity of demand is inelastic
Suppose the demand curve shows a price change from $1.50 to $3.00 per liter of fresh water. What is the percentage change in the quantity demanded?
The percentage change in the quantity demanded is 0% because demand is perfectly inelastic
What's wrong with this sentence? According to the law of demand, as the price of good rises, the quantity demanded of the good rises ceteris paribus.
The quantity demanded of the good *falls* ceteris paribus
Price
The regulator between quantity demanded and supplied
Why is the supply curve upward sloping?
The supply curve slopes upward, reflecting the higher price needed to cover the higher marginal cost of production. The higher marginal cost arises because of diminishing marginal returns to the variable factors.
How to calculate tax revenue
The tax revenue is given by the shaded area, which we obtain by multiplying the taxper unit by the total quantity sold Qt.
Suppose the demand for exotic birds is very inelastic, and the government wants to tax suppliers of exotic birds in an effort to curtail the number of exotic birds entering the country. Who will pay the greater share of such a tax? a. Sellers if exotic birds b. Those who wish to buy an exotic bird c. Government d. Everyone equally
Those who wish to buy an exotic bird
Which of the following would be the most inelastic? A. Crest B. Colgate C. Toothpaste D. Arm and hammer
Toothpaste
How much will total revenue change as a result of a price change based on elasticity
Total revenue (consumer expenditure)= Price * quantity
T/F: Price elasticity of demand is always calculated as a negative number since price and quantity demanded move in opposite directions.
True
Complement
Used together *Increase in price of good A causes a decrease in demand for good B
A company has 500 employees who work 160 hours a month each. Each worker earns $35 per hour. There is a profitable project the company would like to start, but it would require 36,000 additional working hours within 3 months to be completed. The company does not want to hire new staff. Given that the wage elasticity of labor supply is 0.9, calculate the hourly wage the company should offer its employees to encourage them to work on the new project.
Wage elasticity of labor supply= %change quantity of labor supplied/ %change wage 500 employees * 160 working hours per month per employee= 80,000 working hrs per month 36,000 working hrs within 3 months/ 3 months= 12,000 additional working hours per month %change quantity labor supplied: 12,000/ (1/2)(80,000 +(80,000+12,000) *100= 13.95% %change wage: %change quantity labor supplied/ wage elasticity of labor supplied= 13.95%/.09= 15.50% x-35/ (1/2)(x+35)= 15.50% x/new wage= $40.88 per hour
Who pays the tax?
Whoever has the most inelastic component If demand is perfectly elastic= supplier has burden of tax if demand is perfectly inelastic= buyer has burden of tax
Based on the following statement what kind of elasticity does the supply curve have? -The supply curve is referred to as perfectly inelastic
Zero elasticity
What kind of elasticity does a supply curve have if its referred to as perfectly inelastic?
Zero elasticity
price elasticity of demand
a measure of how much the quantity demanded of a good responds to a change in the price of that good *always calculated as a negative number since price and quantity move in opposite directions
supply elasticity
a measure of how the quantity supplied responds to a change in price
incentive
a positive or negative environmental stimulus that motivates behavior -changes the marginal cost and benefit
During flu season, as people try to boost their immune system believing that orange juice might aid in keeping viruses at bay, the: a. Demand for orange juice will shift right b. Demand for orange juice will shift left c. Demand for orange juice will remain unchanged
a. Demand for orange juice will shift right
Other things equal, which of the following might shift the demand curve for gas left? a. Development of a low cost electric cars b. Discovery of bast new oil reserves in Montana c. Increase in price of train and air transportation
a. Development of a low cost electric cars
According to the law of supply, what is the relationship between price and quantity supplied? a. Direct b. Inverse c. No relationship
a. Direct
Suppose that burgers and fries are complements in consumption. If the price of fries increases: a. Overall demand for burger will increase b. Overall demand for burgers will decrease c. Quantity demanded for burgers will increase
b. Overall demand for burgers will decrease
What must happen to the market price in order for a shortage to be eliminated? a. price must fall b. Price must rise c. Price must stay the same d. Price may rise or fall depending on the size of the shortage
b. Price must rise
What must happened to the market price in order for a shortage to be eliminated? a. Price must fall b. Price must rise
b. Price must rise
You are a producer of calculators. In the market for calculators, two events happened simultaneously last month. There was a fire at your calculator factory that eliminated half of your firm's production capability. At the same time, your compensation costs increased by 5% because of an annual pay raise you give your employees. With these events happening simultaneously, which of the following is a consequence? a. The fire causes the supply to shift to the left but the wage increase shifts the demand curve to the right b. The fire causes the demand to shift to the right but the wage increase shifts the supply curve to the left c. The fire causes the supply curve to shift a small amount but the increase in wages causes the supply curve to shift to the left by an even greater amount d. The fire causes the supply curve to shift a large amount but the increase in wages causes the supply curve to shift to the left by an even smaller amount
d. The fire causes the supply curve to shift a large amount but the increase in wages causes the supply curve to shift to the left by an even smaller amount
elastic
describes demand that is very sensitive to a change in price
surplus
quantity supplied is greater than quantity demanded -puts pressure on market to drive price down
What's wrong with this sentence? The price of a good rises, the demand for the good will fall.
the *quantity demanded* for the good will fall.
Macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
Microeconomics
the study of how households and firms make decisions and how they interact in markets
Calculate the cross price elasticity coefficient (value). Based on the cross price elasticity and be able to determine if the two goods are complements or substitutes, how the coefficient sign can indicate a substitute or complement. In a scenario be able to use the information to determine if a good is a substitute or complement.
—Also called cross-price elasticity of demand, this measurement is calculated by taking the percentage change in the quantity demanded of one good and dividing it by the percentage change in the price of the other good -if the cross price elasticity is positive the goods are substitutes, and if the cross price elasticity are negative the goods are complements