Econ Test #2
If the equilibrium quantity of a good is also the socially optimal quantity, then
total economic surplus has been maximized
Excess demand occurs when
when price is below the equilibrium price
A price ceiling that is set above the equilibrium price:
will have no effect on the market
Does price affect quantity demanded or quantity supplied
yes
Suppose that Tom bought a bike from Helen for $195. If Helen's reservation price was $185, and Tom's reservation price was $215, the seller's surplus from this transaction was
$10
If the price is $4 today and there is no change in either supply or demand, one would expect the price in the future to be
greater than $4
The market equilibrium quantity
is sometimes the socially optimal quantity
If demand increases and supply decreases, the change in the equilibrium price will be ______, and the change in the equilibrium quantity will be ______
positive, uncertain
The price elasticity of demand for a good measures the responsiveness of
quantity demanded to a 1 percent change in price of that good
When a market is not in equilibrium:
the economic motives of sellers and buyers will move the market to its equilibrium.
You can spend $10 for lunch and you would like to purchase two cheeseburgers. When you get to the restaurant, you find out the price for cheeseburger has increased from $5 to $6, so you decide to purchase just one cheeseburger. This is best described as:
the income effect of a price change
What included people who can buy a good, but don't. They must have to have access to it to be in this category
the market
Suppose that as the price of apples rises, people switch from eating apples to eating oranges. This is known as
the substitution effect of a price change.
Does the supply curve have a positive or. negative slope
positive
What is perfectly inelastic
0
Name the 3 formulas of elasticity
1. Elasticity= % change in QD/ % change in price 2. Elasticity= change in quantity/ change in price x price/ quantity 3. Elasticity= 1/slope x price/quantity
What are reasons why a graph wouldn't be classified as a demand curve
1. points lie outside of the 1st quadrant 2. the slope is negative
If the price of cheese falls by 1 percent and the quantity demanded rises by 3 percent, then the price elasticity of demand for cheese is equal to:
3: multiply the price by the quantity demanded
A demand curve is ______ sloping because ______
Downward; fewer people are willing to buy an item at higher prices
A percent change in quantity demanded in response to a change in price or when price changes, people either keep buying or stop buying
Elasticity
The tendency of markets to automatically gravitate toward equilibrium is an application of the
Incentive Principle
A good example of central planning at work in the U.S. is
New York City's rent control program
The max selling price of a good set by law, and what is an example of this
Price Ceiling, rent control
The minimum selling price of a good, set by law, and what is an example of this
Price Floor, minimum wages
In a market in which the government has set a price ceiling below the equilibrium price:
a black market might develop
Office workers and word processing programs are compliments if
a decrease in the wage paid to office workers leads to an increase in the demand for word processing programs
Suppose you observe a decrease in the equilibrium price and quantity of corn. this is best explained by
a fall in consumer income assuming cronies a normal good
All else equal, the price elasticity of demand tends to be higher when
a good has many substitutes
A change in supple or demand is a change in what
a shift on the entire curve
A change in quantity demanded or a change in quantity supplied is a movement located where
along the curve
The price of bananas will increase in response to
an excess demand for bananas
An increase in both the equilibrium price and the equilibrium quantity of DVD players is best explained by
an increase in the demand for DVD players
When a slice of pizza at the student union sold for $2, Moe did not purchase any. When the price fell to $1.75, Moe purchased a slice each day for lunch. Thus, we can infer that Moe's reservation price for a slice of pizza is:
at least 1.75 but less than $2
The price elasticity of demand equals 1
at the midpoint of a straight-line demand curve
When the price of a good changes, the amount of that good that buyers wish to buy changes
because of both the substitution and the income effects.
Would a price ceiling be located above or below the equilibrium point
below
What is inelastic?
between 0 and 1, quantity demanded stays the same with an increase on price (water, gas)
What is elastic
between 1 and infinity, quantity demanded drops with an increase on price. (double bubble)
The highest price someone is willing to pay for a good
buyer's reservation price
A movement along a demand curve from one price-quantity combination to another is called a:
change in quantity demanded
If the demand for gadgets increases as a result of a decrease in the price of widgets, the widgets and gadgets are:
complimentary good
In a price ceiling situation (rent control), is the supply or demand high?
demand
a graph showing the quantity of a good that buyers want to buy at each price
demand curve
What type of relationship does price and quantity supplied have
direct
Price and quantity at interaction of supply and demand curve
equilibrium
Suppose supply decreases, but there is no change in demand. As the market reaches its new equilibrium
excess demand will lead the price to rise
Suppose that when the price of broccoli is $4 per pound, buyers wish to buy 500 pounds per day and sellers wish to sell 800 pounds per day. In this case
excess supply will lead the price of broccoli to fall
Suppose that the market price for hot dogs sold by street vendors has just risen from $4.50 to $5.00, and that in response Curly has now begun operating a hot dog cart. We can assume that Curly's reservation price for hot dogs is
greater than 4.50 but not more than $5
Shelly purchases a leather purse for $400. One can infer that
her reservation price was at least $400
The situation described in the book as "smart for one, dumb for all" occurs when
individuals act rationally, but there are still unexploited opportunities for society as a whole
If consumers cannot readily switch to a close substitute when the price of a good increases, the demand for that good is likely to be
inelastic, example: gas, water
If the price of textbooks increases by one percent and the quantity demanded falls by one-half percent, then demand for textbooks is
inelastic: 1 x 1/2= 1/2 meaning it is inelastic
If an increase in income leads to a decrease in the demand for ground beef, then ground beef is an
inferior good
What is perfectly elastic
infinity
The relationship between quantity demanded and price is
inverse
a __________ is any place where two or more parties can meet to engage in an economic transaction
market
On a given linear demand curve, as price increases demand becomes
more elastic
As the price of a good rises
more firms can cover their opportunity costs of producing the good
Efficiency is an important social goal because
movements toward economic efficiency make the total economic pie larger
Is the slope of a demand curve negative or positive?
negative
Does price affect a change in supply or demand? If not what does
no, outside factors
If the demand for a good decreases as income decreases, then the good is a(n):
normal good
If the demand for steak increases as income increases, then steak is a
normal good
If the demand curve is horizontal, then demand is
perfectly elastic
If the supply curve and the demand curve both shift to the left, then the new equilibrium:
quantity will be lower, but the direction of the price change in uncertain
The lowest price someone is willing to sell a good for
seller's reservation price
In a free market, if the price of a good is above the equilibrium price, then
sellers, dissatisfied with growing inventories, will lower their prices
If the demand for olives falls when the price of cheese falls, then we know that cheese and olives are
substitutes
graph showing quantity of a good that sellers want to supply at each price
supply curve
"All else constant, consumers will purchase more of a good as the price falls." This statement reflects the behavior underlying:
the demand curve