Intermediate Price Theory Chapter 2

When supply​ increases, the supply curve___.

Shifts to the right.

Consider two​ goods: paper towels and televisions. Which is a durable​ good?

Televisions

Market Mechanism

Tendency in a free market for price to change until the market clears.

Market Power

The ability of a single economic actor (or small group of actors) to have a substantial influence on market prices.

In general, what do changes in price and quantity demanded depend on?

The amount by which each curve shifts and the shape of each curve.

Because some goods are durable, the total stock of each good owned by consumers is largely relative to what?

The annual production. -A small change in total stock that consumers want to hold can result in a large percentage change in the level of purchases. -Demand is much more elastic in the short run that in the long run.

What does the price elasticity of demand for a good depend on?

The availability of other goods that can be substituted for it.

Suppose that unusually cold weather causes the demand curve for ice cream to shift to the left. Why will the price of ice cream fall to a new​ market-clearing level?

The cold weather will shift the demand curve to the left initially creating a surplus until the price falls to where quantity supplied again equals quantity demanded.

What are factors that determine price elasticity of demand?

-Availability of substitutes -Luxury vs necessity -Proportion of budget spent on a good -Time: *short run= inelastic *long run= elastic

What variables affect quantity demand?

-Income -The weather -The prices of other foods

Even though the annual consumption of copper is now about 100 times greater than it was in​ 1880, the real price of copper has remained relatively unchanged. Which of the following help account for this​ pattern?

-More efficient technologies reduced production costs. -New deposits that were cheaper to mine were discovered. -Demand for copper grew dramatically.

What are the two perspectives on demand?

-Normal Demand -Inverse Demand

What variable affect supply?

-Price they receive -Production costs

What are some examples of production costs?

-Wages -Interest charges -Cost of raw materials

Inverse Demand

A schedule of a consumer's willingness to pay (WTP) for a good at different quantities.

Change In Supply

A shift in the supply curve.

What happens when there are price controls in place?

A shortage develops -Quantity supplied falls -Quantity demanded increases

Shortage

A situation in which quantity demanded is greater than quantity supplied.

Surplus

A situation in which quantity supplied is greater than quantity demanded.

Linear Demand Curve

A straight-line demand curve; such a demand curve has a constant slope but usually has a varying price elasticity.

What can firms face in the short-run supply?

Capacity constraints -They need time to expand capacity by building new production facilities and hiring workers to staff them.

A​ product's price and the quantity consumed both increased from one year to the next. Which of the following could have​ happened?

Demand increased and supply remained constant.

The elasticity of demand is the same as the slope of the demand curve. This statement is____.

False because the price elasticity of demand equals the slope of the demand curve multiplied by price divided by the quantity and the price elasticity of demand changes along the demand curve.

The​ cross-price elasticity will always be positive. This statement is ____.

False because the​ cross-price elasticity will be negative for complements.

What happens when production cost falls?

Firms can produce the same quantity at a lower price or a larger quantity at the same price. -Output increases no matter what the market prices happen to be

What does it mean if the demand curve is downward sloping?

Holding other things equal, consumers will want to purchase more of a good as its price goes down.

Cyclical Industries

Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.

For durable goods, the income elasticity of demand is __ in the short run than in the long run.

Larger

For most goods and services, the income elasticity of demand is __ in the long run than in the short run.

Larger

For many goods, price elasticity of demand is _____ in the long run than in the short run.

Much more price elastic -It takes time for people to change their consumption habits.

Elasticity

Percentage change in one variable resulting from a 1-percent increase in another.

Income Elasticity Of Demand

Percentage change in quantity demanded divided by percentage change in income.

Point elasticity of demand

Price elasticity at a particular point on the demand curve.

Arc elasticity of demand

Price elasticity calculated over a range of prices.

Completely Inelastic Demand

Principle that consumers will buy a fixed quantity of a good regardless of its price.

Infinitely Elastic Demand

Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.

Demand Curve

Relationship between the quantity of a good that consumers are willing to buy and the price of the good.

Supply Curve

Relationship between the quantity of a good that producers are willing to sell and the price of the good

What is an example of a good and service for which short-run supply is completely inelastic?

Rental housing in most cities

Supply Reservation Price

Represents lowest price at which producers are willing to sell the product.

Change In Demand

Shift of the demand curve.

What does it mean if the supply curve is upward sloping?

The higher the price, the more firms are able and willing to produce and sell.

What happens when there are no prices controls in place?

The market clears at the equilibrium price and quantity.

Change In The Quantity Demanded

The movement along the demand curve.

Change In The Quantity Supplied

The movement along the supply curve.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price.

Price Elasticity Of Supply

The percentage change in quantity supplied divided by the percentage change in price.

Cross-Price Elasticity Of Demand

The percentage change in the quantity demanded of one good divided by the percentage change in the price of another good.

Equilibrium Price (Market Clearing Price)

The price at which the quantity demanded of the good equals the quantity supplied.

Would you expect the price elasticity of demand for paper towels to be larger in the short run or in the long​ run? Why?

The price elasticity of demand for paper towels should be larger in the long run as new substitutes enter the market.

What about the price elasticity of demand for​ televisions?

The price elasticity of demand for televisions should be larger in the short run because televisions are durable.

A market is in equilibrium when____.

The price is such that the amount consumers want to buy equals the amount producers want to sell.

Normal Demand

The quantity of a good a consumer is willing to buy at various prices.

The supply of apartments is more inelastic in the short run than in the long run. This statement is ____.

True because the supply of apartments in the short run is limited by capacity constraints.

Complements

Two goods for which an increase in the price of one leads to a decrease in the demand for the other.

Substitutes

Two goods for which an increase in the price of one leads to an increase in the demand for the other.

Price Elastic

When the price elasticity is greater than 1 magnitude.

Price Inelastic

When the price elasticity is less than 1 in magnitude.

Why do​ long-run elasticities of demand differ from​ short-run elasticities?

​Long-run elasticities of demand differ from​ short-run elasticities because durable goods last a relatively long time and it takes time for consumers to respond to price change.