Econ 25 Ch. 3 Quiz

Demand for a good is elastic if the quantity demanded __________ in response to a price change.

changes significantly -Elasticity allows us to measure how much the quantity demanded of a good changes in response to a change in price. If the quantity demanded changes significantly as a result of a price change, then demand is elastic.

Refer to the following figure. At a price of $5, this market is experiencing

shortage -A shortage occurs whenever the quantity supplied is less than the quantity demanded. At price levels below $10, this market experiences a shortage, since quantity supplied is less than quantity demanded for all prices below $10.

What must happen to the market price in order for a shortage to be eliminated?

The price must rise. -Whenever the quantity supplied is less than the quantity demanded, the market price experiences upward pressure. As the price rises, suppliers continue to increase the quantity that they supply and buyers demand an increasingly smaller quantity until the market clears and quantity supplied is equal to quantity demanded.

A change in which of the following will cause a change in the quantity supplied of coffee?

The price of coffee -The law of supply states that, all other things being equal, the quantity supplied increases when the price rises, and the quantity supplied falls when the price falls. Therefore, the price of coffee will cause a change in the quantity supplied of coffee.

Refer to the following graph. The supply curve is __________ because it is driven by the law of supply.

Upward Sloping -The supply curve is a graph of the relationship between the prices on the supply schedule and the quantity supplied at those prices. Since we know prices and quantity supplied move in the same direction, the supply curve slopes upward.

According to the law of supply, what is the relationship between price and quantity supplied?

direct -The law of supply states that, all other things being equal, quantity supplied rises when prices rise, and quantity falls when prices fall.

According to the law of demand, what is the relationship between price and quantity demanded?

inverse -The law of demand states that, all other things being equal, quantity demanded falls when prices rise, and quantity demanded rises when prices fall.

Refer to the following graph. The demand curve slopes downward because

prices and quantity demanded move in opposite directions. -The demand curve is a graph of the relationship between the prices on the demand schedule and the quantity demanded at those prices. Because prices and quantity demanded move in opposite directions, the demand curve slopes downward.

For which of the following goods would you expect demand to be the most responsive to a rise in price?

spaghetti -Consumers are very responsive to a change in the price of spaghetti. Since there are many substitutes available for spaghetti, consumers will switch to something else in response to a small rise in price.

Refer to the following figure. At a price of $15, this market is experiencing a(n)

surplus -A surplus occurs whenever the quantity supplied is greater than the quantity demanded. At price levels above $10, this market experiences a surplus, since quantity supplied is greater than the quantity demanded for all prices above $10.

Which of the following will cause a rightward shift in the supply curve for tobacco?

An improvement in the technology used in the production of tobacco. -A rightward shift of the tobacco supply curve means there is an increase in the supply of tobacco. An improvement in technology allows a producer to increase output with the same resources or to produce a given level of output with fewer resources.

Suppose that Coca Cola and Pepsi are substitutes in consumption. If the price of Coca Cola decreases, then

Both the equilibrium price and the quantity of Pepsi demanded will decrease. -Substitutes are two goods that are used in place of one another. Since Coca Cola and Pepsi are substitutes in consumption, a fall in the price of Coca Cola will result in a leftward shift, or decrease, in the demand for Pepsi. The fall in demand will lead to a lower price and a lower quantity demanded.

When is demand more elastic?

Demand is more elastic when there is ample time to respond to a change in price. -Initially, consumers have no time to adjust their behavior to changes in price; therefore, demand is inelastic. As time passes, consumers have time to adjust their behavior to changes in price; therefore, demand is more elastic. The flexibility of additional time makes demand most elastic.

Suppose pasta salad is a normal good. If the price of pasta (a major ingredient in pasta salad) increases and income also increases, the

Equilibrium quantity of pasta salad may either increase or decrease and the equilibrium price of pasta salad will increase. -The two events cause a shift in both the supply curve and the demand curve. The first event, an increase in the price of pasta—which is used to make pasta salad—increases. This causes a leftward shift of the supply curve. The second event, an income increase, causes a rightward shift of the demand curve because pasta salad is a normal good. The result is that the equilibrium price increases but the effect on equilibrium quantity is unknown.

Flour is a factor of production of cupcakes. How will an increase in the price of flour affect the market for cupcakes?

Overall supply will decrease -Changes in the cost of inputs are one determinant of supply that will cause supply to shift. If the prices of inputs increase, a firm's profit margins fall. Lower profit margins make the firm less willing to supply the good; therefore, supply will decrease.

Suppose that burgers and fries are complements in consumption. If the price of fries increases, the

Quantity demanded for burgers will decrease -A change in the price of a related good causes a shift of the demand curve. Complements are two goods used together. If the price of a complement in consumption increases, then demand for both goods will decrease because they are consumed jointly.

Refer to the following image. When a market is in equilibrium, which of the following is true?

Quantity supplied is equal to quantity demanded -When a market is in equilibrium, supply and demand are balanced. This is represented graphically by the point at which the demand curve and supply curve intersect. According to the law of supply and demand, market prices adjust to bring the quantity supplied and the quantity demanded into balance, or equilibrium.

Which of the following is NOT characteristic of a market economy?

Significant government intervention -A market economy allocates resources among households and firms with little or no government intervention.

A change in which of the following will cause a change in the quantity demanded of coffee?

the price of coffee -The law of demand states that, all other things being equal, the quantity demanded falls when price rises, and the quantity demanded rises when the price falls. Therefore, a change in the price of coffee will cause a change in the quantity demanded of coffee. A change in any of the determinants of demand—for example a change in consumer income, the number of people consuming coffee, or a change in the price of a substitute—will cause a shift of the demand curve.