econ review unit 2
the cross-price elasticity of demand between good j and k is 3. a 20% decrease in the price of good k will result in a
60% increase in the quantity demanded of good j
shifts in demand
Tastes and Preferences Number of Consumers Price of Related Goods Income Future Expectations
assume that the demand for bottled water is relatively price elastic. an increase in supply of bottled water will result in which of the following?
a decrease in price, leading to an increase in total revenue
which of the following is most likely to occur when a competitive market adjusts from one equilibrium to another
a decrease in supply and demand will cause the equilibrium quantity to decrease but the equilibrium price to be indeterminate
which of the following statements relating to supply is true
a decrease in the price of a good will lead to a decrease in the quantity supplied of that good
which of the following changes will lead to an increase in the supply of good x
a decrease in the price of energy, a key input to the production of good x
according to the law of demand, an increase in the price of grape juice will result in
a decrease in the quantity of grape juice demanded
unit elastic
a given change in price causes a proportional change in quantity demanded (E=1)
elasticity
a measure of the responsiveness of quantity demanded or quantity supplied to a change in one of its determinants
price elasticity of demand
a measure of the sensitivity of demand to changes in price
which of the following would shift the short-run supply curve for strawberries
a strike by all farmworkers
relatively elastic
a term used when the price elasticity of demand is greater than 1 but less than infinity (E=>1)
relatively inelastic
a term used when the price elasticity of demand is less than 1 but greater than zero (E= <1)
PES
measures how sensitive quantity supplied is to a change in price (percent change in quantity supplied/percent change in price)
complements
two goods that are bought and used together
double shift rule
If two curves shift at the same time, either price or quantity will be indeterminate
based on the graph above, the consumer surplus at the market equilibrium price and quantity is shown by which area?
ZMN
the demand curve for a normal good slopes down for which of the following reasons
-an increase in the price of the good induces consumers to purchase substitute products -an increase in the price of goods reduces consumers purchasing power
elastic demand (TR)
-price increase causes TR decrease -price decrease causes TR increase
inelastic demand (TR)
-price increase causes TR to increase -price decrease causes TR to decrease
the law of demand is the result of
-the substitution effect, the income effect, and the law of diminishing marginal utility
following a decrease in the supply of oranges, the price of orange juice increased by 20%, which resulted in a 10% increase in the quantity of apply juice consumed. this implies that cross-elasticity of demand between orange juice and apple juice is
0.5
Change in Demand vs. Change in Quantity Demanded
A change in demand is when the whole curve shifts and a change in quantity demanded is movement along the demand curve due to a change in price. Price Doesn't shift the curve.
shortage
A situation in which quantity demanded is greater than quantity supplied (price is below equilibrium level)
surplus
A situation in which quantity supplied is greater than quantity demanded (price is above its equilibrium level)
normal goods
Goods for which demand goes up when income is higher and for which demand goes down when income is lower.
inferior goods
Goods for which demand tends to fall when income rises.
5 shifters of supply
Price of resources, number of producers, technology, taxes and subsidies, expectations of future profits
total revenue formula
Price x Quantity
What doesn't shift the Demand or Supply Curve?
Price!!! (Only causes movement along the curve)
ceteris paribus
all other things held constant
if bologna is an inferior good, which of the following must be true?
an increase in consumer income will decrease the demand of bologna
assume the income elasticity of demand for good z equals 5. which of the following is true
an increase in income will lead to a decrease in demand
which of the following will cause the supply curve for shoes to shift to the right
an increase in the number of firms producing shoes
which of the following events will cause the demand curve for hamburgers to shift to the right
an increase in the price of pizza, a substitute for hamburgers
Total surplus
consumer surplus + producer surplus
to determine whether two goods are complements, one would calculate the
cross-price elasticity of demand
assume that the price elasticity of supply for good y is 0.5. if the price of good y decreases by 30%, the quantity supplied of good y will
decrease by 15%
suppose that the demand for vegetables is price elastic. if the price of vegetables increases by 5%, the quantity of vegetables demanded would
decrease by more than 5%
deadweight loss
decrease in total surplus
the graph above show the supply and demand curve for a particular brand of computers. in 1988, 10,000 computers were sold for $1,000 each but in 1989, 9,000 computers were sold for $1,000 each. which of the following changes in supply and demand curves would most likely have caused this change
demand curve: indeterminate supply curve: left
elastic supply characteristics
easier to produce, low barriers to entry (many firms), low cost or generic inputs, easy to switch from producing alternative goods, elasticity coefficient greater than 1
characteristics of inelastic goods
few substitutes, necessities, elasticity coefficient less than 1
perfectly elastic
flat demand curve; consumers are perfectly price sensitive (E=infinity)
substitutes
goods used in place of one another
inelastic supply characteristics
hard to produce, high barriers to entry (few firms), high cost or specialized inputs, hard to switch from producing an alternative good, elasticity coefficient less than 1
income effect
if the price goes down for a product, the purchasing power increases for consumers, allowing them to purchase more
substitution effect
if the price goes up for a product, consumers buy less of that product and more of another substitute product (vice-versa)
a change in which of the following will cause a change in supply of personal computers in the short run
improved technology
which of the following situations best illustrates the law of demand
in the past several months, as the price of compact discs players have decreased, the quantity of compact disc players sold has increased
if the demand for insulin is inelastic, a 5% increase in the price of insulin will
increase the total revenue of insulin producers
To alleviate a financial crisis, a university increases student fees. This action will increase university revenues if the price elasticity of demand for university education is
inelastic
characteristics of elastic goods
many substitutes, luxuries, large portion of income, elasticity coefficient greater than 1
elastic coefficient is always _______, these numbers are the absolute value
negative
calculating percent change
new-old/old (x100)
equilibrium
no individual would be better off doing something different
A city transit authority increases the price of subway and bus tickets from $1.25 to $1.50. If the demand for these tickets is price elastic, the number of people riding buses and subways and the city's revenues will most likely change in which of the following ways?
number of people riding: decrease cities revenues: increase
calculating PED
percent change in quantity demanded/percent change in price
Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. an increase in consumers incomes will most likely affect the equilibrium price and quantity of potatoes in which of the following ways?
potatoes: price-decrease, quantity-decrease rice: price-increase, quantity-increase
unit elastic (TR)
price changes and TR remain unchanged
a competitive market is in equilibrium when
price has moved to a level at which the quantity of a good or service demanded equals the quantity of that good or service supplied.
A decrease in raw material prices will change the equilibrium price and quantity in a market in which of the following ways?
price: increase quantity: decrease
perfectly inelastic
quantity does not respond at all to changes in price (E=0)
inelastic demand
quantity is insensitive to a change in price
elastic demand
quantity is sensitive to a change in price
if a 10% increase in the price of a good leads to a 25% decrease in the quantity demanded of the good, demand is
relatively elastic
income elasticity of demand
shows how sensitive a product is to a change in income, shows if a good is normal or inferior (percent change in quantity/percent change in income)
cross-price elasticity of demand
shows how sensitive a product is to a change in price of another good, it shows if two goods are substitutes or complements
consumer surplus in a market for a good exists because
some consumers would be willing to pay more than the equilibrium price of the good
assume that the market for lemonade is perfectly competitive and currently in equilibrium. lemons are key ingredients in lemonade. if the price of lemons decreases, how will the lemonade market be affected?
supply will shift rightward, increasing the equilibrium price and increasing the equilibrium quantity of lemonade
in a perfectly competitive market, a change in which of the following could cause a shift in the supply curve
technology
consumer surplus
the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it (buyers maximum - price)
quantity demanded
the amount of a good or service that a consumer is willing and able to purchase at a given price
price of related goods
the demand curve for one good can be affected by a change in the price of another related good
producer surplus
the difference between the current market price and the cost of production for the firm (price -sellers minimum)
supply
the different quantities of a good that sellers are willing and able to sell (produce) at different prices
demand
the different quantities of goods that consumers are willing and able to buy at different prices
if income elasticity coefficient is negative
the good is inferior
if income elasticity coefficient is positive
the good is normal
if coefficient for cross-price elasticity is negative
the goods are complements
in coefficient for cross-price elasticity is positive
the goods are substitutes
law of diminishing marginal utility
the more you consume of a good or service, the less utility each additional unit gives you
the cross-price elasticity of demand between good x and good z measures the percent change in quantity demanded of good x in response to a percentage change in
the price of good z
equilibrium price
the price that balances quantity supplied and quantity demanded
equilibrium quantity
the quantity bought and sold at the equilibrium price
the price elasticity of demand for a product is 0.5. If the price of the product increases by 20%, which of the following will occur?
the quantity demanded of the good will decrease by 10%
assume that corn is used to produce ethanol. simultaneously, more effective control of pests and weeds occurs in farming. which of the following will definitely occur in the corn market
the quantity of corn will increase
law of supply
there is a direct relationship between price and quantity supplied
law of demand
there is an inverse relationship between price and quantity demanded
price signals
used to describe how prices convey information and help society use resources more efficiently
total revenue test
uses elasticity to show how changes in price will affect total revenue
which of the following best describes the law of demand
when the price of a good increases, the quantity demanded of the good decreases