Supply and Demand

Given a supply slope of 1000, the government would like to increase supply of pizzas by 2,000 by lowering the tax ____ per pizza.

$2.00: E = chg Q / chg P; ch P = chg Q / E; 2,000/1,000 = $2.00

Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the slope of the demand line?

-.3

Given the supply line: P = 80 + .02Q, slope is _____ and the vertical intercept is _____.

.02, 80

Slope represents the change in quantity over the change in price.

False, it is the change in PRICE over the change in QUANTITY.

Services that consume a large part of the budget are inelastic.

False, items that consume a large part of the budget are more elastic.

Eliminating substitutes causes demand to be more elastic.

False, less substitutes makes demand more inelastic.

Decreasing the marginal product of capital decreases product demand.

False, marginal product of capital does not affect consumer product demand.

Negative externalities shift social costs onto producers.

False, onto consumers

Perfect information means that the product must be free of defects.

False, perfect information means that the buyer and seller have equal and full knowledge concerning the transaction. Buying a flawed product may be desirable if the price is right.

The cross-price elasticity of demand between coke and pepsi will be negative.

False, positive, as Coke prices increase, so will Pepsi's sales.

Increasing number of buyers causes supply to increase.

False, producers change supply, customers change demand. As demand increases, price increases, then QUANTITY supplied increases but supply itself does not shift.

The law of supply states that quantity supplied decreases as price increases.

False, quantity supplied would increase as price increases

Congress passes a law subsidizing corn farmers, the supply of corn will decrease.

False, supply of corn would increase.

Supply increases when the number of suppliers drops.

False, supply would decrease.

A firm facing higher taxes will increase production.

False, the ability of firms to supply services will decrease at each price point.

A parallel shift of either the demand or supply line would cause their slope to change.

False, the slope remains the same, only the intercept changes (we assume only parallel shifts).

The vertical intercept explains the percentage of price determined by quantity.

False, the vertical intercept is the price level at which quantity is zero.

Consumers cannot use the market price system to determine an allocation of income.

False, they do

Transaction costs include the product price.

False, transaction costs are defined in this course to include costs other than the price.

Significant positive externalities can cause the market to overproduce goods and services.

False, underproduce

40.Any two points on a straight line will produce the same slope.

40.True

If an additional 50 labor hours are required to produce 200 pizzas, then the marginal product of labor is ______.

4: 200/50

Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the vertical intercept of the supply function?

50

When quantity increases from 2.0 million units to 2.5 million units as income increases 5%, then the income elasticity of demand equals _____.

5: 25%/5%

Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q What is the equilibrium price and quantity (P, Q)?

85, 50

The change in _____ can be used to evaluate the desirability of government projects.

98.social surplus

A large number of buyers and suppliers is not an assumption for a competitive market.

False, without a large number of both buyers and sellers, one would enjoy market power and thus be able to manipulate price.

Social surplus is bad for an economy.

False.

Improving the level of technology shifts the production possibilities curve outward.

True, allows more output with a given level of input.

The income elasticity of demand for autos will be positive.

True, as people earn more income, they buy more cars or more expensive cars.

When price elasticity > 1, then demand is elastic.

True, note we assume absolute value.

Given inelastic demand for alcohol, increasing the price will increase revenue.

True, people will not reduce purchases and will pay the higher price.

As the price of Mountain Dew increases, the supply of Pepsi could decrease.

True, suppliers would shift from making Pepsi to making Dew.

Significant transactions costs can give sellers market power.

True, the can raise prices by the amount of transactions costs without losing customers

Blocking exit can cause firms to reconsider entry.

True, the risk of failure has increased.

Decreasing the price of green fees increases sales of golf balls.

True, they are complementary goods.

Restricting entry allows incumbent firms some market power.

True, they can increase price without fear of competition.

The State of Florida has increased taxes on advertising agencies, the supply of advertising will decline.

True, this has actually happened in Florida.

Improving the level of technology generally improves both the marginal product of labor and capital.

True, true by definition.

A price elasticity of -1.4 implies that demand is price _____, that is, _____.

elastic, sensitive

Homogeneous goods exist as goods that are viewed by the consumer as being _____.

equal

Total Revenue (TR) is maximized where price elasticity _____.

equals one (the absolute value that is)

Which of the following are correct assumptions of a competitive market.

free entry and exit, many buyers and sellers.

The _____ states that as price falls quantity increases.

law of demand

Anything that increases costs, causes the supply curve to shift to the _____.

left

Decreasing the number of suppliers would shift the supply curve to the _____.

left

For an inferior good, as income increases the demand curve shifts to the _____.

left

Increasing taxes on a firm would cause the supply curve to shift to the _____.

left

With free exit, markets experiencing _______ will find supply decreasing and prices _______ as firms exit.

losses, increasing

If Jorge wants to sell 1,000 more pizzas with a demand slope of -.004, then Jorge will need to _____ price by ______.

lower, $4

When there are many buyers and sellers then everyone is a _______.

price taker

Movement along the demand curve is due to a change in _____.

price.

If a drop in demand causes prices to drop, then ______ will decrease.

production (quantity supplied)

Price elasticity of demand is the percentage change in _____ divided by the percentage change in _____.

quantity, price

Shifting demand or supply lines would cause the slope to _____.

remain the same

Advertising is designed to influence tastes and preferences in favor of purchase thus shifting the demand curve to the ______.

right

An improvement in production technology would shift the supply curve to the ______.

right

Increasing demand causes the demand curve to shift to the ______.

right

Any slope is defined as _____ over _____.

rise, run

Market power is the ability to _____.

set price

A reduction in the labor force will cause the production possibilities curve to ______.

shift inward

Given a slope of .30, then for change in price of 100 the quantity supplied/demanded) will (increase/decrease) _____ units.

supplied, increase, 333; slope = rise/run; .3 = 100/x; solve for x

Increasing the price of a product related by production would cause _____ to shift to the left.

supply

If the cost of cheese decreases, then _____ of pizza will _____.

supply, not change

If the government fixes the price above the market price, then a(n) ______ will occur.

surplus

Increasing demand decreases producer surplus.

False, it increases it.

Differentiating goods allows sellers some degree of market power.

True, "extra features will cost you ..."

Demand curves slope _____ according to the law of demand.

downward

A government subsidizing a price will ______ its Treasury.

drain

_______ efficiency is the optimal distribution of utility.

Allocational

Increasing supply, increases demand.

False, demand comes from customers. Income of buyers, tastes of buyers, number of buyers, and prices of related goods affect demand.

Increasing the cost of coffee causes demand for cream to increase.

False, increasing the cost of coffee should lower coffee consumption, hence cream consumption should also decrease.

Consumer surplus is equal to producer surplus.

False , one can be greater than the other.

Asymmetric information is necessary for a competitive market.

False, Symmetric information

A change in price causes the demand curve to shift to the right.

False, a change in price moves along the demand curve, a change in income would shift it.

A competitive market minimizes producer surplus.

False, but it maximizes social surplus, the total of producer and consumer surplus.

A change in the number of suppliers increases demand.

False, demand comes from customers. Income of buyers, tastes of buyers, number of buyers, and prices of related goods affect demand.

______ is the amount of goods that is being given up.

Opportunity cost

Equation A: P = 50 + .7Q Equation B: P = 100 - .3Q Given a price of $50, there will be a _____ of _____ units.

Shortage, 167

A shortage suggests that quantity demanded is greater than quantity supplied.

True

Countercyclical industries may sell products that are income inferior.

True

Decreasing price, increases quantity demanded.

True

Decreasing the price of a good related in production increases supply.

True

Increasing demand causes price to increase which causes quantity supplied to increase.

True

Increasing national income normally causes consumer demand to increase.

True

Increasing peanut subsidies causes the supply of peanuts to increase.

True

Increasing supply increases consumer surplus.

True

Increasing taxes on commodities such as sugar causes their supply to decrease.

True

Increasing the marginal product of labor increases supply.

True

Increasing the price of Mountain Dew increases demand for Pepsi.

True

Increasing time allows demand to be more elastic.

True

Luxuries tend to be price elastic.

True

Movement along the demand curve is due only to a change in price.

True

Producers can use input prices to determine the best method of production.

True

Producers have an incentive to improve efficiency as they earn more profit.

True

The marginal rate of substitution is measure by the slope of the production possibilities curve.

True

The point at which the supply and demand lines intersect is equilibrium.

True

Vertical demand curves are more inelastic.

True

An increase in price causes supply to _____.

change quantity supplied.

Soda and chips would be considered _______ goods.

complementary

If demand for product A increases as the price of product B drops, then these are _____.

complementary goods.

Demand curve will increase due to a(n):

increase in income.

A supply curve will decrease due to a(n):

increase in production costs.

The marginal product of capital is _____ by technology improvements.

increased

_____ is the gain in trade to the seller.

Producer surplus

_____ is the maximum combinations of two or more goods that can be produced.

Production possibilities curve

_____ is the sum of the consumer and producer surplus.

Social surplus

What are the determinants of demand?

Tastes & preferences, number of buyers, income, and prices related to goods.

_____are directly related to exchanges such as recording fees in the Clerk of Circuit Court.

Transactions cost

Externalities occur when consumption or production of a good generate social _____ in the addition to private benefits or costs.

benefits or costs Production Possibilities Curve

Movement along the demand curve due to a change in price causes a _______.

change in quantity demanded

Movement along the supply curve due to a change in price causes a ______.

change in quantity supplied

A(n) _____ market is said to exist when buyers and sellers are price takes.

competitive

A cross-price elasticity of -2.0 implies that the product is a _____.

complement

Coffee and cream would be considered ______ goods.

complementary

Demand for ______ good increases as the price of the related good decreases.

complementary

Firms do not want to have large inventories as they incur ______.

costs

When firms experience excess inventories, they tend to ______ and/or ______.

cut prices, cut production

A competitive market _____ social surplus.

maximizes

To achieve equilibrium, we assume firms are taking actions consistent with ______.

maximizing profit

To achieve equilibrium we assume consumers are taking actions consistent with ______.

maximizing satisfaction

Governments will collect ____ tax revenues from a sales tax on inelastic goods or services.

more

An increase in capacity utilization would cause ______.

movement up along the supply curve

Marginal product of labor is the change in _____ resulting from one more unit of _____.

output, labor

The production possibilities curve shifts _____ when labor is increased.

outward

Normal income elasticity of demand will be ______.

positive

The trade-off between producing consumer goods versus capital goods reflects the choice between ______.

present and future consumption

Opportunity cost is the _____ of the best alternative.

price (could also be benefit)

If demand increases due to a change in tastes, then _____ will increase thereby causing _____ to increase.

price, production (quantity supplied)

Demand slope represents the change in _____ needed to change one unit of _____.

price, quantity

Slope is defined as the change in _____ over the change in ______.

price, quantity

Anything that increases profits, causes the supply curve to shift to the _____.

right

Increasing a subsidy would cause the supply curve to shift to the ______.

right

An improvement in technology will cause the production possibilities curve to _____.

shift outward (increases)

If the government fixes a price below the market price, then a(n) ______ will occur.

shortage

A price ceiling causes a _____ as quantity demanded is _____ quantity supplied.

shortage, greater than

Calculated elasticities are valid for ____ changes in demand.

small

Given the demand line: P = 120 -.01Q, slope is _____ and the vertical intercept is ______.

-.01, 120

If price decreases $10 while quantity increases 50, then the slope is _____.

-.20: (-10/50)

When price drops from $25 to $20, while quantity increases from 100 to 120, then the price elasticity of demand is _____. (Use the point elasticity formula)

-1: -20%/20% = -1

If 1,000 tons of wheat are given up to grow 2,000 tons of rice, then the marginal rate of substitution is _____.

.5 tons of wheat per ton of rice (1,000/2,000)

If price increases $20 while quantity increases 40, then the slope is _____.

.50: (20/40)

Given a demand line slope of -4,a price change of _____ would be necessary to increase quantity demanded by 50 units.

200; -4 = P / 50; p = -200; it is negative as it is a price cut.

If an additional 3 ovens are needed to bake 150 pizzas, then the marginal product of capital is ______.

50: 150/3

_____ exists when either the buyer or seller has an informational advantage in the transaction.

Asymmetric information

______ are held constant in constructing a production possibilities curve.

Labor, capital, and technology

_____ are fixed when graphing a particular production possibilities curve.

Capital and labor

_____ is the gain in trade to the buyer.

Consumer surplus

Given a slope of -.01, then to induce a change of 100 units in quantity demanded, _____ will have to (increase/decrease) by _____ dollars.

decrease, $1

If price decreases, quantity supplied ______.

decreases

If price increases, quantity demanded ______.

decreases

If the number of buyers decreases, demand ________.

decreases

As the number of buyers _____, the demand curve shifts to the left, thus _____.

decreases, decreasing

When demand is price elastic, _____ price increases Total Revenue (TR).

decreasing

If prices drop even though supply has not changed, then ______ must be responsible.

demand

Every point on a demand curve has a/the _____ elasticity.

different

Elasticities are often used for _____. Consumer and Producer Surplus

forecasting sales Consumer and Producer Surplus

An efficient allocation of capital means capital is put to its _____.

highest and best use

If income increases 5%, given an income elasticity of 2, then sales will _____.

increase 10%: 2 = x/5%, 5% * 2 = 10%

When prices rise, due to increased demand, firms ______ to maximize profit.

increase production

As income increases, demand for a normal good _____.

increases

If resource prices decrease, supply _____.

increases

If the cost of dough used in making pizzas drops then supply _____, price _____.

increases, decreases

An _____ relationship occurs when changes in one variable do not affect the value of another variable.

independent

A good that has an income elasticity of -1.0 is a(n) _____.

inferior good

Blocking entgry limits the number of _____.

suppliers (or sellers)

If price increases even though demand has not changed then ______ must be responsible.

supply

An increase in capacity would cause ______.

supply curve to shift to the right

A price floor causes a _______ as quantity demanded is _________ quantity supplied.

surplus, less than

Supply curves have a _____ slope according to the law of supply.

upward

The _____ intercept is the price where quantity equals zero.

vertical

The _____ and _____ are needed to describe a straight line.

vertical intercept, slope