Micro Test #2 (Ch. 3&6)

Inelastic demand

0 < |Ed | < 1

No change.

A patient is given a prescription for a drug to control high blood pressure. The patient's insurance doesn't cover drugs, so the patient must pay out of pocket. If price of this drug triples and there is no substitutes for this drug, what do you think will happen to the quantity demanded of this drug? Fall by two third. Fall by half. No change. Not enough information

The income effect

A result of a fall in the price of gasoline, consumers buy more gasoline and take more driving vacations. This situation is an illustration of: The income effect The substitution effect Diminishing marginal utility The rationing function of prices

Rationing Function of Prices

Ability of the competitive forces of supply and demand to establish a market clearing-price. At this price, those who are willing to pay will receive the product. At this price, those who are willing to sell will be able to sell the product.

The Market demand

Adding quantity demanded of all consumers Sum horizontally (in graph)

The substitution effect

As a result of the decrease in the price of hamburger, consumers buy more hamburger and fewer frankfurters. This is an illustration of: Consumer sovereignty The income effect The substitution effect Changing tastes and preferences

Substitution Effect

As price falls, the product is relatively cheaper than substitutes so you buy more of the product

Income effect

As price falls, you feel richer and buy more

positive and therefore X is a normal good.

Assume that a 4 percent increase in income across the economy produces an 8 percent increase in the quantity demanded of good X. The coefficient of income elasticity of demand is: negative and therefore X is an inferior good. negative and therefore X is a normal good. positive and therefore X is an inferior good. positive and therefore X is a normal good.

Market equilibrium

At the intersection between market demand and market supply Because there is no more adjustment. It is where Q. demanded equals Q. supplied.

0.36

Consider heating oil in RI, if price is $3 per gallon, quantity demanded is 10 million gallons per month. If price is $4 per gallon, quantity demanded is 9 million gallons per month. Find the price elasticity of demand of heating oil in RI. 0.25 0.36 0.67 2.71

inelastic

Demand for gasoline is more _____ than the demand for designer clothes

elastic

Demand for leisure cruises is more ____ than the demand for milk

Normal good

Demand varies directly with income

Substitutability Proportion of Income Luxuries versus Necessities Time

Determinants of Price Elasticity of Demand

Taste Number of buyers Income Prices of related goods (substitutes and complements) Consumer expectations

Determinants of demand

Input prices Technology Taxes and subsidies Prices of other goods Producer expectations Number of sellers

Determinants of supply

the two goods are compliments

E A,B < 0

the two goods are substitutes

E A,B > 0

the good is inferior

E I < 0

the good is normal

E I > 0

the good is a luxury

E I > 1

Inelastic supply

Es < 1

Perfectly inelastic supply

Es = 0

unit elastic supply

Es = 1

elastic supply

Es > 1

perfectly elastic supply

Es ≈ ∞

Consumer Expectations

Expectations about the future such as future income, economic situation, future price level, etc.

Law of Supply

Firms want to sell more at a higher price, ceteris paribus

go down

If Technology leads to higher cost of production of a particular product, then the supply curve of that product will

go up

If Technology leads to lower cost of production of a particular product, then the supply curve of that product will

Elastic

If a 5 percent fall in the price of a product causes the quantity demanded of the product to increase by 10 percent, the demand is: Inelastic Elastic Unit elastic Perfectly elastic

elastic

If consumers are relatively responsive to price changes, demand is said to be

inelastic

If consumers are relatively unresponsive to price changes, demand is said to be

it'll be ineffective

If price floor is set below the equilibrium price, then _________

fall, be indeterminate

If the demand decreases and supply increases, the equilibrium price will _________ and the equilibrium quantity will _________. rise, rise rise, be indeterminate fall, rise fall, be indeterminate

rise, be indeterminate

If the demand increases and supply decreases, the equilibrium price will _________ and the equilibrium quantity will _________. rise, rise rise, be indeterminate fall, rise fall, be indeterminate

Neither the equilibrium price nor equilibrium quantity will be affected.

If the legal price ceiling is set above the equilibrium price: A shortage of the product will occur. A surplus of the product will occur. A black market will evolve. Neither the equilibrium price nor equilibrium quantity will be affected.

Increase quantity demanded by 5 percent

If the price elasticity of demand for a product is equal to 0.5, then a 10 percent decrease in price will: Increase quantity demanded by 5 percent Increase quantity demanded by 0.5 percent Decrease quantity demanded by 5 percent Decrease quantity demanded by 0.5 percent

Increase quantity demanded by 20 percent

If the price elasticity of demand for a product is equal to 2, then a 10 percent decrease in price will: Increase quantity demanded by 10 percent Increase quantity demanded by 20 percent Decrease quantity demanded by 10 percent Decrease quantity demanded by 20 percent

go up, go down

Law of Supply: When price rises, quantity supplied________. When price falls, quantity supplied________.

buyers and sellers

Markets bring together

Price ceiling (Examples: Rent control, Gasoline price (during oil shock))

Maximum legal price a seller can charge. Set below the equilibrium price

Price floor (Examples: minimum wage, milk price)

Minimum legal price a seller receives

The price of CDs increases, the quantity of CDs demanded will decrease

Other things being equal, the law of demand implies that as: The demand for CDs increases, the price will decrease Income increases, the quantity of CDs demanded will increase The price of CDs increases, the quantity of CDs demanded will decrease The price of CDs increases, the quantity of CDs demanded will increase

% delta Qd/% delta P

Price Elasticity of Demand (Ed) Equation, Average Formula

% delta Qd/ original Qd/ % delta P/ original P

Price Elasticity of Demand (Ed) Equation, Midpoint Formula

above

Price floor needs to be set _______ the equilibrium price

Shortage

Quantity demanded is greater than quantity supplied. (excess demand)

Surplus

Quantity supplied is greater than quantity demanded. (excess supply)

Supply

Shows the amount of product that a producer is willing to sell at different prices.

price elasticity of demand

The degree of responsiveness or sensitivity of consumers to a change in price is measured by the concept of

quantity demanded of X/percentage change in price of Y.

The formula for cross elasticity of demand is percentage change in: quantity demanded of X/percentage change in price of X. quantity demanded of X/percentage change in income. quantity demanded of X/percentage change in price of Y. price of X/percentage change in quantity demanded of Y.

Measures the effect of a price change on total revenue

The importance of Ed

elastic (more)

The longer time consumers have to adjust to a price change, the ________ price elasticity of demand.

inelastic (lower)

The smaller the price of the product as a percentage of income, the _______ price elasticity of demand

Price x Quantity

Total revenue

Change in price of the product itself

What causes quantity demanded to change?

Change in price of the product itself

What causes the movement along the same demand curve?

Market mechanism

When out of equilibrium, the market will automatically adjust back

go down, go up

When price of a product rises, quantity demanded ___. When price of a product falls, quantity demanded ____, ceteris paribus

-1.5

When the price of a product is increased 10 percent, the quantity demanded decreases 15 percent. The elasticity of demand for this product is: 1.5 -1.5 1/5 -1/5

rise, fall

When there is an decrease in supply, equilibrium price will ________ and equilibrium quantity will _________. rise, rise rise, fall fall, rise fall, fall

fall, rise

When there is an increase in supply, equilibrium price will ________ and equilibrium quantity will _________. rise, rise rise, fall fall, rise fall, fall

Yacht.

Which product has the most elastic demand? Paint. Eggs. Prozac. Yacht.

Dialysis.

Which product has the most inelastic demand? Phone service. Coffee. 3D movie. Dialysis.

A typical consumer will receive less satisfaction from consuming the fourth hamburger per week than the third hamburger per week

Which statement best illustrates the concept of diminishing marginal utility? If the price of hamburger declines, there will be a change in consumer tastes in favor of hamburger A typical consumer will receive less satisfaction from consuming hamburgers than from consuming pork A typical consumer will receive less satisfaction from consuming the fourth hamburger per week than the third hamburger per week A decrease in the price of hamburger will cause consumers to buy more hamburger because they have, in effect, received an increase in income

Diminishing marginal utility Income effect Substitution effect

Why downward sloping?

inelastic

You will only increase the price of your product in order to raise the total revenue only when the demand of the product is.....

taxes, go up, shift, left

______: Increase in corporate taxes will ______ cost of production and ______ the market supply to the _____.

Subsidies, go down, shift, right

_______: Increase in subsidies will_______ cost of production and _______ the supply market curve to the ____.

long run

a time long enough to change plant capacity

short run

a time too short to change plant capacity

Inferior goods

demand varies inversely with income

Decrease input prices

firm's cost of production decreases so they can produce more at all levels of prices. (Supply shifts right - increase in supply)

Increase input prices

firm's cost of production increases so they offer fewer units at all levels of prices. (Supply shifts left - decrease in supply)

Substitute good

is one that can be used in place of another good

complementary good

is one that is used together with another good

Change in quantity demanded

move along the curve

Unity

percentage change in quantity demanded equals percentage change in price

Elastic

percentage change in quantity demanded is greater than percentage change in price

Inelastic

percentage change in quantity demanded is less than percentage change in price

Change in demand

shift the curve

Equilibrium price is deemed too high/low. Equity is a concern. There is a political reason.

sometimes Government intervenes when

marginal utility

the first cookie tastes really good, the second one is good but not as good as the first one and so forth

Perfectly inelastic demand

| Ed | = 0

Unit-elastic demand

| Ed | = 1

Elastic demand

| Ed | > 1

Perfectly elastic demand

| Ed | is about infinity