Micro Chapter 2

Complements and substitutes of a given good affect the demand for that good. Define complements and substitutes.

A complement is a good that is purchased and used in combination with another good. A substitute is a good that can be used in place of another good.

In what direction will price and quantity move as a result of a demand shift?

A demand shift causes equilibrium price and quantity to change in the same direction. More specifically, an outward shift in demand increases both price and quantity, while an inward shift in demand decreases price and quantity.

What is the difference between an elasticity and slope?

The slope of a supply or demand curve relates changes in the level of prices to changes in the level of quantity demanded or supplied. Elasticity represents the responsiveness of quantities to prices. More specifically, we express elasticity as the percentage change in quantity for a given percentage change in price.

What form do inverse supply and demand equations take? Why do economists often represent supply and demand using the inverse equations?

The inverse demand curve expresses the price of a product as a function of quantity demanded. The inverse supply curve expresses the price of a product as a function of quantity supplied. Expressing price as a function of quantity makes the demand and supply choke prices more explicit.

Define market equilibrium. What is true of the quantity supplied and demanded at the market equilibrium?

The market equilibrium occurs at the intersection of supply and demand curves for a good. At equilibrium, the quantity supplied by producers equals the quantity demanded by consumers.

There are four key assumptions underlying the supply and demand model. Name these assumptions.

The supply and demand model assumes that (a) supply and demand are in a single market, (b) all goods in the market are identical, (c) all goods sell for the same price and everyone in the market has the same information, and (d) there are many consumers and producers in the market.

What simplifying assumption do we make to build a demand curve? Why is the demand curve downward-sloping?

We assume that there is no change in any other factors that may also affect how much of a good a consumer buys. The downward slope reflects the fact that consumers demand less of a good as its price increases.

Using the concept of cross-price elasticity of demand, describe substitutes and complements.

When a good has a positive cross-price elasticity with another good, that good is a substitute for the other good. When a good has a negative cross-price elasticity with another good, that good is a complement for the other good.

Why is the direction of change of either price or quantity unknown when both supply and demand shift?

When both supply and demand shift, the direction of change in either quantity or price is determined by the relative magnitudes and directions of the shifts.

What happens when price is below the equilibrium price? Why?

When the market price is too low, there is excess demand (shortage) for a good because consumers demand more of the good than producers are willing to supply at the relatively low price.

We learned that economists have special terms for elasticities of particular magnitudes. Name the magnitudes for the following: inelastic, elastic, unit elastic, perfectly elastic, and perfectly inelastic.

inelastic: E<1, elastic: E>1, unit elastic: E=1, perfectly elastic: E=0, and perfectly inelastic: E = infinity

What is the difference between a change in quantity demanded and a change in demand?

A change in quantity demanded is a movement along the demand curve that occurs because of a change in the good's own price, while a change in demand reflects a shift of the entire demand curve caused by a change in a determinant of demand other than the good's price.

What is the difference between a change in quantity supplied and a change in supply?

A change in quantity supplied is a movement along the supply curve that occurs because of a change in the good's own price, while a change in supply reflects a shift of the entire supply curve caused by a change in a determinant of supply other than the good's price.

In what direction will price and quantity move as a result of a supply shift?

A supply shift causes equilibrium price and quantity to change in opposite directions. More specifically, an outward shift in supply decreases price but increases quantity; an inward shift in supply increases price but decreases quantity.

What happens to equilibrium price when supply and demand shift in the same direction? What happens to equilibrium quantity in the same situation?

If supply and demand both increase, quantity increases; if both supply and demand decrease, quantity decreases. The effect on price is unknown: It depends on the relative magnitudes of the supply and demand shifts.

Using the concept of income elasticity of demand, describe normal, luxury, and inferior goods.

Normal goods have positive income elasticities; luxury goods have income elasticities greater than 1; and inferior goods have negative income elasticities.

Why is the supply curve upward sloping?

The upward slope of the supply curve reflects the fact that holding all else equal, producers supply more of a good as its price increases.