microecon exam #1
ex: the market for lemonade is in equilibrium and the price of lemonade rises. in the lemonade market ________ will ________, ________ the equilibrium price and ______ the equilibrium quantity: a) demand; decrease; decreasing; decreasing b) demand; decrease; increasing; decreasing c) supply; increase; decreasing; increasing d) supply; decrease; increasing; decreasing
d
does a leftward shift in supply increase or decrease equilibrium quantity?
decrease
how is demand affected by income increase?
depends on if the good is normal or inferior, but if the good is normal, the increase in income implies a rightward shift in demand
advancement in technology shifts the supply curve in which way?
down and to the right
what happens to equilibrium price when supply shifts to the right?
equilibrium price decreases at the new equilibrium point
when are two goods substitutes?
if the price of one good is directly related to the demand for the other good
a rightward shift in demand causes both equilibrium price and quantity to do what?
increase
does a leftward shift in supply increase or decrease equilibrium price?
increase
suppose income increases, how does this affect the market/graph?
it affects demand
how does technological advance in personal computer production affect the market for PC's?
it affects the supply side of the market and causes the supply curve in the market to shift right
an increase in income shifts the demand curve what direction for an inferior good?
left
a decrease in taste creates a shift in demand in which direction?
leftward shift
expectations cause a shift of the supply curve in which direction?
leftward shift because if sellers believe product price will be higher in the future compared to now, that could cause them to store their stuff or hold back supply now
ex: there has been a sudden influx of refugees in the small town of Dallon, leading to a doubling of the local population. the graph depicts Dallon's market for food. does the supply or demand curve shift, and in which direction? do equilibrium price and quantity increase or decrease?
only demand curve shifts right, supply does not change equilibrium price and quantity increase because moving the demand curve to the right creates an upward shift, which allows the equilibrium quantity between the two curves to change
ex: below is a supply and demand curve for spaghetti. assume that the price of rice increases and the price of meatballs decreases. does the supply or demand curve shift, and in which direction? do equilibrium price and quantity increase or decrease?
only the demand curve shifts right, not supply equilibrium price and quantity increase because moving the demand curve to the right creates an upward shift, which allows the equilibrium quantity between the two curves to change
what happens to the curves if demand and supply shift in the opposite direction?
outward shift in demand increases the price, leftward shift in demand increases the price, so when the two curves go in the opposite direction, the impact on price is clear (increases) but for quantity it is ambiguous (or depends on which curve shifts to a greater degree)
what is the "law of one price"?
where in a competitive market at equilibrium, one price (the equilibrium price) prevails
equilibrium
where quantity demanded is equal to quantity supplied
is the market "self correcting"?
yes
determinants of demand
• Income -> NORMAL (+) VERSUS INFERIOR (-) • Price of related goods -> SUBSTITUTES (+) VERSUS COMPLIMENTS (-) • Tastes (+) • Expectations (?) • Number of consumers (+) o + = direct relationship between income and demand for inferior good o - = inverse relationship between income and demand for inferior good
3 step approach:
• Step 1-determine whether the event affects supply or demand • Step 2-how does the event affect the relevant demand or supply curve • Step 3-use the model to determine the effect of the event on the market's equilibrium
competitive market characteristics:
• The social welfare of our nation thrives on competitive markets • Lots of buyers and sellers • Buyers and sellers are "prize takers"
what causes a change in supply?
-change in input prices -change in prices of related goods -change in technology -change in expectations -change in number of sellers
consumer surplus
-difference between what you are willing to pay and what you actually pay -difference between total value and total expenditure
determinants of supply
-input prices -prices of related goods -technology -expectations -number of sellers
what factors shift the demand curve?
-price of related goods -consumer income -tastes or preferences -expectations -number of consumers
why does the law of demand prevail?
1) substitution effect-price of one thing relative to the other things decreases, making it more attractive compared to the substitute 2) income effect-if cola gets more expensive, you have less purchasing power as a result because the cost of living has gone up
ex: the law of demand states that other things equal, as the price: a) increases, the quantity demanded will increase b) decreases, the demand curve will shift to the right c) increases, demand will increase d) increases, the quantity demanded will increase
d
ex: Anna is willing to sell her 20 year old boat, but for not less than $2,300. for Anna, the cost of selling this boat is ______ $2,300. a) equal to b) more than c) less than d) there is not enough information to answer this question
a
ex: Jeanette is willing to pay $100 for the first pair of shoes, $80 for the second pair, $50 for the third, and $30 for the fourth. if shoes cost $50, Jeanette will buy _____ pairs of shoes and her total consumer surplus will be ______. a) three; $80 b) four; $110 c) four; $80 d) three; $230
a
ex: holding all other things constant, if ramen noodles are an inferior good to Vanessa, then as her income increases, her demand curve for ramen noodles... a) will shift left b) will shift right c) will not shift at all d) may shift left or right, but we're not sure by how much
a
ex: the number of seats in a football stadium is fixed at 70,000. the team raises the price of a ticket from $30, at which 70,000 are sold, to $40, and it sells 60,000 tickets. the price change caused a change in the consumer surplus of: a) -$650,000 b) -$100,000 c) -$10,000 d) -$10
a
law of demand
a decrease in price will increase quantity demanded or states that the price of a good or service is inversely related to the quantity demanded of that good
what causes a shift in the supply curve?
a good's quantity demanded or supplied changes even though price stays the same
what is the demand curve?
a graphical representation of the relationship between price and quantity demanded
rationale
a higher price gives existing sellers more profit incentive to offer more of the good for sale than at a lower price
a change in the price of a good will cause a shift or movement in the demand curve?
a movement
change in product prices causes a movement or shift along the supply curve?
a movement along the supply curve
a change in any supply determinants creates a movement or shift in the supply curve?
a shift
ex: if total surplus falls, there may have been an _____ in demand or an ____ in supply: a) increase; increase b) decrease; increase c) increase; decrease d) decrease; decrease
d
ex: during the Obama administration, the development of low-cost batteries for electric cars received large amounts of federal funding in terms of subsidies. meanwhile, American households gave a higher priority towards minimizing their environmental impact. consider the market for zero-emissions electric vehicles where there is an upward-sloping supply curve and a downward sloping demand curve. a. which direction will demand and supply shift? b. what will happen to equilibrium price? c. what will happen to the equilibrium quantity?
a. both curves will shift right b. change is ambiguous c. quantity increases -now that the batter has funding and more people want to buy the cars, both supply and demand curves shift right, and since they are both shifting right but the price is not given to us, change in price is ambiguous.
ex: suppose the graph depicts the market for a one point bag of M&M's. at which price is an excess supply (surplus) created?
above where the two lines intersect, specifically at $7 if the equilibrium is $5
technological advance
an invention or innovation that allows more to be produced from a given amount of resources
ex: a technological advance in the production of automobiles will _______ the ______ automobiles: a) decrease; demand for b) increase; supply of c) decrease; demand d) decrease; supply of
b
ex: if the US increased tariffs on imports of lumber from Canada (which raises the price of lumber in the US), the equilibrium price of new homes in the US will ______ and the equilibrium quantity of new homes in the US will __________. a) increase; increase b) increase; decrease c) decrease; increase d) decrease; decrease
b
ex: if the market for grapefruit is in equilibrium without any outside intervention to change the equilibrium price: a) there is some inefficiency in the grapefruit market b) total surplus is maximized c) total surplus is minimized d) a few mutually beneficial trades are missed
b
ex: if the price of a commodity increases, you can expect the... a) supply to increase b) quantity supplied to increase c) quantity supplied to decrease d) supply curve to shift to the right
b
ex: market failure refers to a situation in which: a) market determined wages are not high enough to raise all workers above the poverty line b) markets fail to reach an efficient outcome c) markets establish a high price for necessities d) markets fail to reach a fair outcome
b
ex: suppose the equilibrium price of a good Y is $5 and the equilibrium quantity is 150 units. If the price of good Y is $12.... a) the quantity demanded will be greater than 150 units b) the quantity supplied will be less than 150 units c) there will be an excess demand for good Y d) there will be an excess supply of good Y
d
ex: a consumer's willingness to pay reflects: a) the equilibrium price of the good or service b) the cost of producing the good or service c) the maximum price at which he or she would buy the good or service d) the minimum price at which he or she would buy the good or service
c
ex: along a given downward sloping demand curve, a decrease in the price of a good will _______ consumer surplus. a) decrease b) it's impossible to tell what will happen to consumer surplus c) increase d) have no effect on
c
ex: if there is an increase in supply, assuming a positively sloped supply curve and a negatively sloped demand curve, total surplus: a) may change, but we can't tell how b) will remain the same c) will increase d) will decrease
c
ex: producer surplus for an individual seller is equal to: a) the cost of the good minus the willingness to pay for the good b) the cost of the good minus the price of the good c) the price of the good minus the cost of producing the good d) willingness to pay for the good minus the price of the good
c
ex: the typical supply curve illustrates that... a) other things equal, the quantity supplied for a good is inversely related to the price of a good b) other things equal, the supply of the good creates its own demand for the good c) other things equal, the quantity supplied for a good is positively related to the price of a good d) price and quantity supplied are unrelated
c
ex: which of the following is true of a normal good? a) when income increases, the demand for the good remains unchanged b) when income increases, the demand for the good decreases c) when income increases, the demand for the good increases d) income and the demand are unrelated
c
ex: which of the following would NOT cause the supply curve to shift? a) a change in the technology of production b) a change in input costs c) a change in the price of the good d) a change in suppliers' expectations of future prices
c
ex: you notice that the price of blu ray players falls and the quantity of blu ray players sold increases. you suspect that.... a) demand for blue ray players shifts to the right b) demand for blue ray players shifts to the left c) supply of blue ray players shifts to the right d) supply of blue ray players shifts to the left
c
what causes shift in the demand curve?
change in factors other than price
what causes movement along the demand curve?
change in price
what causes a movement in the supply curve?
change in quantity supplied is caused by change in price
ex: an increase in the price and an ambiguous change in the quantity is most likely caused by: a) a shift to the left in demand and no shift in supply b) a shift to the left in supply and no shift in demand c) a shift to the right in supply and a shift to the left in demand d) a shift to the left in supply and a shift to the right in demand
d
what does the demand curve show the relationship between?
price and quantity demanded (inverse relationship)
supply
refers to the quantity of the good that sellers are willing to provide at various prices
a decrease in income shifts the demand curve what direction for an inferior good?
right
an increase in taste creates a shift in demand in which direction?
rightward shift
an increase in the number of sellers causes a shift in the supply curve in which direction?
rightward shift
if a change in one of the supply shifters occurs, then the entire supply curve does what?
shifts
which way does the demand curve shift if demand increases?
the demand curve shifts to the right
when moving the demand curve, what is the effect on the equilibrium quantity and price?
the equilibrium quantity increases as well as price
ex: if there is a tropical storm and half of the orange crop in forida gets destroyed, what happens to the price of oranges (input price) and shift of the supply curve?
the increase in input price shifts the supply curve up and to the left
ex: for a company called Charmant and Mignon, the makers of cute stuffed animals, assume they are the only suppliers in this industry. then assume that a third supplier chooses to join the industry, Pour Enfants. what happens as a result?
the market supply curve will shift to the right because as price increases, sellers supply more
what if two events occur simultaneously to affect the market curves?
use the 3 step approach
when are two goods compliments?
when the price of one good is inversely related to demand for the other good