Econ midterm 2

Raising prices _____ total revenue for a product with inelastic demand, and _____ total revenue for a product with elastic demand

raises; lowers

If demand for a product decreases, then

equilibrium price and equilibrium both decrease

Which of the following statements is correct with respect to determining the price of a product?

Demand and supply are equally important

Total surplus

EQ: consumer surplus PLUS producer surplus. value to buyer-cost to seller

Producer surplus

EQ: market price minus willingness to sell. difference between the market price and the minimum price the seller is willing to accept. sellers gains

Consumer surplus

EQ: willingness to pay minus market price. difference between the maximum price the buyer is willing to pay and the market price. buyers gains

If ED = 4, then

a price increase of 1% will reduce quantity demanded by 4%

The gap between the demand curve and the market price is called

consumer surplus

If demand is inelastic, a

decrease in the price lowers the total revenue

Which of the following is the MOST likely effect of an increase in the price of flashlights upon the market for batteries?

decreased equilibrium price and decreased equilibrium quantity

What causes equilibrium quantity to fall

demand and supply both decrease

What causes equilibrium quantity to rise

demand and supply both increase

Ceteris paribus, the effect of a decrease in income on a normal good is to shift the

demand curve to the left, reducing both equilibrium price and output.

What causes equilibrium price to fall

demand decrease and supply increase

What causes equilibrium price to rise

demand increase and supply decrease

The reason economists use the midpoint method to compute elasticity is that

economists want the elasticity to be the same whether the price is increasing or decreasing

If the supply of a product increases then

equilibrium price decreases and equilibrium quantity increases

If the supply of a product decreases then

equilibrium price increases and equilibrium quantity decreases

Inferior goods

income elasticity < 0

Normal goods

income elasticity > 0

Gasoline is produced from crude oil. Ceteris paribus, if the supply of crude oil falls, the equilibrium price of gasoline will

increase and the equilibrium quantity will decrease

A movement upward and to the right along a supply curve is called an

increase in quantity supplied

An increase in the price of a good will

increase quantity supplied

When consumers are very loyal to a particular product and the product's price increases, the producer's total revenue

increases

When total expenditures and price are positively related, demand is

inelastic

An item whose demand rises as people's incomes fall is known as a(n) ________ good

inferior

If consumers believe that an item will not be available in the future, then demand will shift

right and the equilibrium quantity will rise

An increase in supply is represented by a

rightward shift of a supply curve

If demand is elastic, a reduction in price causes total revenue to rise because

the percentage increase in quantity demanded exceeds the percentage decrease in price

The market supply curve represents

the sum of the quantities supplied by all the sellers at each price of the good

When the price of a good or service changes

there is a movement along a given supply curve

Raising prices has no effect on total revenue if a product's demand curve is:

unitary elastic

Shortage

when quantity demanded is greater than quantity supplied

Surplus

when quantity supplied is greater than quantity demanded

Midpoint equation (a.k.a. equation of price elasticity of demand)

( Q2-Q1)/(Q1+Q2)/2] / ( P2-P1)/(P1+P2)/2]

Walmart is thinking about offering a 25% discount on a brand of shoes. If the elasticity of demand is two, then the discount would increase sales by

50%

Price elasticity of supply equation

Percentage change in quantity divided by percentage change in price

What does not shift the supply curve for a good or service

a change in the price of the good or service

If demand for a product increases then

equilibrium price and equilibrium quantity both increase

A decrease in supply is represented by a

leftward shift of a supply curve

The sum of all the individual supply curves for a product is called

market supply

If supply is unit elastic

price elasticity = 1. supply curve is perfect diagonal on graph. sellers price sensitivity is intermediate

If demand is inelastic

price elasticity of demand < 1. demand curve relatively steep

If demand is perfect inelastic

price elasticity of demand = 0. demand curve vertical

If demand has unit elasticity

price elasticity of demand = 1. demand curve diagonal

If demand is elastic

price elasticity of demand > 1. demand curve relatively flat

If demand is perfect elastic

price elasticity of demand is infinity. demand curve horizontal

If supply is inelastic

price elasticity of supply < 1. supply curve is relatively steep curve on graph. sellers price sensitivity is low

If supply is perfectly inelastic

price elasticity of supply = 0. supply curve is vertical line on graph. sellers price sensitivity is none

If supply is elastic

price elasticity of supply > 1. supply curve is relatively flat on graph. sellers price sensitivity is high

If supply is perfectly elastic

price elasticity of supply is infinity. supply curve is horizontal line on graph. sellers price sensitivity is extremely

When supply and demand both increase, equilibrium

price may increase, decrease, or remain unchanged

Total revenue

price x quantity

The gap between the supply curve and the market price is called

producer surplus

A firm will MOST likely decrease the price of its output if the

quantity demanded of the good exceeds the quantity supplied

A decrease in supply causes the equilibrium price to ___________ and the equilibrium quantity to ___________.

rise; fall

An increase in demand causes the equilibrium price to __________ and the equilibrium quantity to ____________

rise; rise

Suppose the Terrific Tube Company ran a very successful advertising campaign. Economic analysis would suggest that the campaign would cause the equilibrium price to ______ and the equilibrium quantity to ______

rise; rise

When quantity supplied decreases at every possible price, we know that the supply curve has

shifted to the left

When quantity supplied increases at every possible price, we know that the supply curve has

shifted to the right

When people cannot buy all of a good they demand at the going price, there is a

shortage

Suppose that quantity supplied of a product equals 5 and quantity demanded equals 8. In this market, there is a

shortage of this product and the price should rise

A ________ occurs when price is above market equilibrium

surplus

A good is a normal good if:

the demand curve shifts out if income goes up

If the price of JoBob's Beef Jerky increases in price and JoBob, Inc. makes tens of millions more dollars, then we can safely conclude that

the demand for JoBob's Beef Jerky is price inelastic

The flatter the demand curve

the greater the price elasticity of demand

The greater the price elasticity of supply

the more easily sellers can change the quantity they produce

The steeper the demand curve

the more inelastic the price elasticity of demand demand

If demand is unitary elastic, a reduction in price leaves total revenue unchanged because

the percentage changes in quantity demanded and price are the same