Econ midterm 2
Raising prices _____ total revenue for a product with inelastic demand, and _____ total revenue for a product with elastic demand
raises; lowers
If demand for a product decreases, then
equilibrium price and equilibrium both decrease
Which of the following statements is correct with respect to determining the price of a product?
Demand and supply are equally important
Total surplus
EQ: consumer surplus PLUS producer surplus. value to buyer-cost to seller
Producer surplus
EQ: market price minus willingness to sell. difference between the market price and the minimum price the seller is willing to accept. sellers gains
Consumer surplus
EQ: willingness to pay minus market price. difference between the maximum price the buyer is willing to pay and the market price. buyers gains
If ED = 4, then
a price increase of 1% will reduce quantity demanded by 4%
The gap between the demand curve and the market price is called
consumer surplus
If demand is inelastic, a
decrease in the price lowers the total revenue
Which of the following is the MOST likely effect of an increase in the price of flashlights upon the market for batteries?
decreased equilibrium price and decreased equilibrium quantity
What causes equilibrium quantity to fall
demand and supply both decrease
What causes equilibrium quantity to rise
demand and supply both increase
Ceteris paribus, the effect of a decrease in income on a normal good is to shift the
demand curve to the left, reducing both equilibrium price and output.
What causes equilibrium price to fall
demand decrease and supply increase
What causes equilibrium price to rise
demand increase and supply decrease
The reason economists use the midpoint method to compute elasticity is that
economists want the elasticity to be the same whether the price is increasing or decreasing
If the supply of a product increases then
equilibrium price decreases and equilibrium quantity increases
If the supply of a product decreases then
equilibrium price increases and equilibrium quantity decreases
Inferior goods
income elasticity < 0
Normal goods
income elasticity > 0
Gasoline is produced from crude oil. Ceteris paribus, if the supply of crude oil falls, the equilibrium price of gasoline will
increase and the equilibrium quantity will decrease
A movement upward and to the right along a supply curve is called an
increase in quantity supplied
An increase in the price of a good will
increase quantity supplied
When consumers are very loyal to a particular product and the product's price increases, the producer's total revenue
increases
When total expenditures and price are positively related, demand is
inelastic
An item whose demand rises as people's incomes fall is known as a(n) ________ good
inferior
If consumers believe that an item will not be available in the future, then demand will shift
right and the equilibrium quantity will rise
An increase in supply is represented by a
rightward shift of a supply curve
If demand is elastic, a reduction in price causes total revenue to rise because
the percentage increase in quantity demanded exceeds the percentage decrease in price
The market supply curve represents
the sum of the quantities supplied by all the sellers at each price of the good
When the price of a good or service changes
there is a movement along a given supply curve
Raising prices has no effect on total revenue if a product's demand curve is:
unitary elastic
Shortage
when quantity demanded is greater than quantity supplied
Surplus
when quantity supplied is greater than quantity demanded
Midpoint equation (a.k.a. equation of price elasticity of demand)
( Q2-Q1)/(Q1+Q2)/2] / ( P2-P1)/(P1+P2)/2]
Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by
50%
Price elasticity of supply equation
Percentage change in quantity divided by percentage change in price
What does not shift the supply curve for a good or service
a change in the price of the good or service
If demand for a product increases then
equilibrium price and equilibrium quantity both increase
A decrease in supply is represented by a
leftward shift of a supply curve
The sum of all the individual supply curves for a product is called
market supply
If supply is unit elastic
price elasticity = 1. supply curve is perfect diagonal on graph. sellers price sensitivity is intermediate
If demand is inelastic
price elasticity of demand < 1. demand curve relatively steep
If demand is perfect inelastic
price elasticity of demand = 0. demand curve vertical
If demand has unit elasticity
price elasticity of demand = 1. demand curve diagonal
If demand is elastic
price elasticity of demand > 1. demand curve relatively flat
If demand is perfect elastic
price elasticity of demand is infinity. demand curve horizontal
If supply is inelastic
price elasticity of supply < 1. supply curve is relatively steep curve on graph. sellers price sensitivity is low
If supply is perfectly inelastic
price elasticity of supply = 0. supply curve is vertical line on graph. sellers price sensitivity is none
If supply is elastic
price elasticity of supply > 1. supply curve is relatively flat on graph. sellers price sensitivity is high
If supply is perfectly elastic
price elasticity of supply is infinity. supply curve is horizontal line on graph. sellers price sensitivity is extremely
When supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged
Total revenue
price x quantity
The gap between the supply curve and the market price is called
producer surplus
A firm will MOST likely decrease the price of its output if the
quantity demanded of the good exceeds the quantity supplied
A decrease in supply causes the equilibrium price to ___________ and the equilibrium quantity to ___________.
rise; fall
An increase in demand causes the equilibrium price to __________ and the equilibrium quantity to ____________
rise; rise
Suppose the Terrific Tube Company ran a very successful advertising campaign. Economic analysis would suggest that the campaign would cause the equilibrium price to ______ and the equilibrium quantity to ______
rise; rise
When quantity supplied decreases at every possible price, we know that the supply curve has
shifted to the left
When quantity supplied increases at every possible price, we know that the supply curve has
shifted to the right
When people cannot buy all of a good they demand at the going price, there is a
shortage
Suppose that quantity supplied of a product equals 5 and quantity demanded equals 8. In this market, there is a
shortage of this product and the price should rise
A ________ occurs when price is above market equilibrium
surplus
A good is a normal good if:
the demand curve shifts out if income goes up
If the price of JoBob's Beef Jerky increases in price and JoBob, Inc. makes tens of millions more dollars, then we can safely conclude that
the demand for JoBob's Beef Jerky is price inelastic
The flatter the demand curve
the greater the price elasticity of demand
The greater the price elasticity of supply
the more easily sellers can change the quantity they produce
The steeper the demand curve
the more inelastic the price elasticity of demand demand
If demand is unitary elastic, a reduction in price leaves total revenue unchanged because
the percentage changes in quantity demanded and price are the same