Econ 101

What causes a shift of the demand curve?

^ consumer income ^ population (increases demand) ^change in taste/preference substitute goods (price ^) complementary goods (price decrease)

if the demand for economics study guides is elastic, an increase in price will result in___?

a decrease in total revenue

Excess supply occurs when the price is less/greater than the equilibrium price.

greater

The market demand curve is the horizontal/vertical sum of the individual demand curves.

horizontal

An excess demand for a product will cause the price to increase/decrease.

increase

A decrease in the supply of a product increases/decreases the equilibrium price and increases/decreases the equilibrium quantity.

increases; decreases

An increase in demand for a product increases/decreases the equilibrium price and increases/decreases the equilibrium quantity.

increases; decreases

Demand and Supply--Law of Demand and Supply

Negative/positive relationship between quantity demanded/supplied, ceteris paribus.

Equilibrium

Price-quantity pair for which both buyers and sellers are satisfied.

Perfect Competition

Prices are given, large numbers of buyers and sellers, product homogeneity, no barriers to entry.

A change in demand causes a movement along/shift of the demand curve.

shift of

When demand/supply changes, the equilibrium price and the equilibrium quantity change in opposite directions.

supply

Excess demand occurs when the price is less/greater than the equilibrium price.

less

What causes a movement along the demand curve?

A change in price

If supply increases while demand decreases, the equilibrium price will increase/decrease.

decrease

As consequence of the price change, the quantity demanded will increase/decrease and the quantity supplied will increase/decrease.

decrease; increase

The cross elasticity between good X and good Y is positive. Other things being held equal, if the price of X rises______?

the quantity of Y demanded increases.

The price elasticity of demand for a product is 1.5 and you would like to see the quantity demanded increase by 30%. Then the percentage change in price should be _____?

20%

The supply curve will be more elastic when.... (a) a good has many substitutes (b)the firm is experiencing diminishing returns to a variable input (c)firms' response to a price is limited by the limited capacity of their production facilities (d) inputs to production are scarce

(c) firms' response to a price change is limited by the limited capacity of their production facilities

Which of the following variables change as we move along the supply curve for pencils? -quantity of pencils supplied -price of wood -price of pencils -production technology

-quantity of pencils supplied -price of pencils

Suppose that the % change in demand is 10%, the price elasticity of demand is 1, and the price elasticity of supply is 2. What is the percentage change in the equilibrium price?

3.33%

If the price elasticity of demand is 0.5, this means that a ______ increase in price causes a ______ decrease in quantity demanded.

30%; 15%

Explain why the price elasticity varies even when a firm faces a linear demand curve. Make sure to define what the price elasticity is.

A linear demand curve has a constant slope. A constant slope implies that absolute changes in quantity demanded remain unchanged with respect to a unit change in price. However, the concept of price elasticity is based on percentage change rather than absolute change. Thus, even if the slope of a demand curve is constant, percentage change in quantity demanded and percentage change in price between tow different points vary.

Excess demand & Supply (Shortage & Surplus)

Automatic adjustment towards equilibrium.

(T/F) As your income increases, demand for all goods increases.

Fasle; inferior goods (ex: Ramen noodles--when income increases, you generally buy less ramen noodles.)

A good is said to be inferior if____?

It has a negative income elasticity of demand.

Why do you think the demand for coffee is less elastic than the demand for restaurant meals?

It may have to do with availability of good substitutes or percentage of the consumers' budget. People can always eat at home. But it's harder to find a good substitute for coffee, so people are less sensitive to coffee prices changes than to restaurant meal price changes. Also, coffee is a much smaller percentage of consumers' budget than meals.

When a firm hired its tenth worker, its factory output increased by four units per month. Would you expect the firm's output to increase by eight more units/month if the firm hired two more workers?

No. The principle of diminishing returns suggests that after some point of increasing returns, each incremental worker should have a progressively lower level of marginal productivity.

Different people eat different amounts of food when they go to buffet restaurants, even though they all pay the same price. Explain how this relates to the marginal principle.

The marginal monetary cost of eating more is zero, so people will eat until they would not enjoy eating another bite. There is an implicit cost of eating more once you are full (extra weight and physical discomfort). Therefore, people will eat until marginal benefit equals marginal cost, and this will occur at different amounts of food for different people.

If both demand and supply increase simultaneously, the equilibrium price will increase if the change in demand/supply is relatively large.

demand

If supply increases while demand decreases, the equilibrium quantity will decrease if the change in demand/supply is relatively large.

demand

When demand/supply changes, the equilibrium price and the equilibrium quantity change in the same direction.

demand

The market demand for a product will shift to the right when the price of a substitute good increases/decreases; the price of a complementary good increases/decreases; consumer income increases/decreases; the population increases/decreases.

increases; decreases; increases; increases

The value of money or income in terms of the quantity of goods the money can buy is called its ____?

real value

A change in supply causes a movement along/shift of the supply curve.

shift of

A change in quantity causes a movement along/shift of the demand curve.

movement along

A change in the quantity supplied causes a movement along/shift of the supple curve.

movement along