Exam 2

Price ceilings

Below equilibrium = shortage, Qd > Qs

Assume that the elasticity of demand is 1.6. Is demand elastic or inelastic?

Elastic

Change in quantity supplied

Caused by a change in the price of the given good

Does change in price of inputs shift supply or demand?

Supply

If your reservation price is ______ then your customer surplus would be $4 if the sale price is $6?

$10

Joseph consumes pizza and soda. He is currently consuming three units of pizza and two units of soda. The price of pizza is $5 and the price of soda is $1. If he is consuming the optimal consumption bundle and his marginal utility of pizza is 50, then his marginal utility of soda is:

10

Price floor

Above equilibrium = surplus, Qd < Qs

Law of diminishing marginal utility

Additional consumer satisfaction from the last unit of consumption falls as more of the good is consumed

What does Ceteris Paribus mean?

All else held constant

If the marginal utility from consuming more of a good is zero, total utility is

Constant

A business should ___________ (increase/decrease) the price of a good with an elastic demand if it wants to increase revenues.

Decrease

Does consumer expectations shift supply or demand?

Demand

Does income shift supply or demand?

Demand

Does price of other goods shift supply or demand?

Demand

Does taste shift supply or demand?

Demand

If all NFL players start wearing Adidas apparel how would that affect the Supply and Demand graph for Adidas goods?

Excess demand = shortage, Quantity increases, Price increases

If the price of iPhones increases significantly how will that affect iPhone cases supply and demand?

Excess supply = surplus, Quantity decrease, and Price decrease

A business should ___________ (increase/decrease) the price of a good with an inelastic demand if it wants to increase revenues.

Increase

Law of Demand

Increase in price (P) causes decrease in quantity (Q) demanded

Law of Supply

Increase in price (P) causes increase in quantity (Q) supplied

Utility or Total Utility

Is the satisfaction obtained by the consumer from consuming a good

The Income Elasticity of a good is 5. If the percent change in your income is 10%, what will happen to your % change of your quantity demanded?

It will rise by 50%

Does price of good shift demand or supply?

Neither (movement along)

Equilibrium

Occurs at price (Pe) where quantity demanded = quantity supplied. At Pe, all sellers willing to sell will be able to sell and all buyers willing to buy will be able to buy

Properties of equilibrium

P > Pe - surplus P < Pe - shortage P = Pe - stable

Change in Supply

Results from change in the cost of production, business taxes, expected future price or quantity, change in the price of other produced goods, change in the number of sellers, change in planned sales at all prices, and change in technology

Change in Demand

Results from changes in tastes, income, personal taxes, prices of related goods (substitutes or compliments), expected future price or quantity, number of buyers, or a change in planned consumption at all prices

Does change in technology shift supply or demand?

Supply

Does profitability of an alternate product shift supply or demand?

Supply

Does tax on producer change supply or demand?

Supply

Production possibility frontier

The alternative combinations of final goods and services that could be produced in a given time period with all available and limited resources and technology

Less than one -Inelastic Demand

The quantity demanded is not sensitive to changes in prices. Specifically, demand is inelastic if the percentage change in quantity demanded divided by the percentage change in price is less than one.

Greater than one -Elastic Demand

The quantity demanded is sensitive to changes in prices. Specifically, demand is elastic if the percentage change in quantity demanded divided by the percentage change in price is greater than one.

Economics

The study of how scarce resources are allocated among competing uses

Microeconomics

The study of the behavior of consumers and producers operating in the individual markets of the economy

If the price elasticity of demand for a good is 2 and price increases by 2 percent, the quantity demanded

decreases by 4%

What is unitary elasticity?

if the elasticity of demand is equal to one, that is called unitary elasticity

If the percentage change in price is greater than the percentage change in quantity demanded, demand

is inelastic

Marginal Utility

is the extra utility from an additional unit of consumption

MU

is the slope of the total utility curve. MU decreases as more quantity is consumed. This is the law of diminishing MU

Price ceilings above the equilibrium price and price floors below the equilibrium price will both lead to

no change in production or consumption

Margarine and butter are predicted to have

positive cross-elasticities of demand with respect to each other

The price elasticity of demand refers to a measure that shows the

responsiveness of quantity demanded of a good to changes in its price

Holding a product's price below its equilibrium level will

result in less of the good being consumed

Opportunity Cost

the loss of potential gain from other alternatives when one alternative is chosen.

Elasticity of Demand is defined as

the percentage change in quantity divided by the percent change in price