Unit Two: In Class Exam # 2 Materials ECON 202

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, typically sloping downward.

Supply Curve

A graph that shows the relationship between the price of a good and the quantity supplied, typically sloping upward.

What results from a rightward shift in the demand curve?

A higher equlibrium price and quantity

What is a price ceiling in a market graph, and where is it located relative to the equilibrium?

A price ceiling is a maximum legal price that can be charged for a good or service, set below the equilibrium price (Pe).

Where is the price floor set in relation to the market equilibrium, and what does it represent?

Above the market equilibrium price (Pe). It represents the minimum price at which a good can be sold, typically set by the government or a regulatory body to achieve policy goals.

What causes the demand curve to shift to the right?

An increase in demand, which can be caused by factors like an increase in consumer income, a rise in the price of substitutes, or a change in tastes towards the good.

What leads to a decrease in the equilibrium price but an increase in equilibrium quantity?

An increase in supply, which results from factors such as improvements in technology, a decrease in production costs, or an increase in the number of sellers.

What are the effects of a leftward shift in the supply curve?

An increase in the equilibrium price and a decrease in the equilibrium quantity, which can be caused by factors like natural disasters, increased production costs, or a reduction in the number of sellers.

What is the current federal minimum wage in the United States as of 2024?

As of 2024, the federal minimum wage in the United States is $7.25 per hour.

What is the current minimum wage for the State of Michigan?

As of 2024, the minimum wage in Michigan is $10.33 per hour.

In what way does the price system aid in resource allocation in an economy?

As resources flow towards more profitable goods and services, indicated by price increases, thereby aiding in effective resource allocation.

How do the quantity of labor demanded (Qd) and supplied (Qs) compare at the minimum wage?

At the minimum wage, the quantity of labor demanded (Qd) is lower than at the equilibrium wage, while the quantity of labor supplied (Qs) is higher, leading to a surplus of labor.

At the price ceiling, how do the quantity demanded (Qdx) and quantity supplied (Qsx) compare, and what does this lead to?

At the price ceiling, the quantity demanded (Qdx) is greater than the quantity supplied (Qsx), leading to a shortage in the market.

How do the quantity demanded (Qdx) and quantity supplied (Qsx) compare at the price floor, and what does this lead to?

At the price floor, the quantity demanded (Qdx) is lower than the quantity supplied (Qsx), leading to a surplus in the market.

How does rent control create a persistent shortage of rental units?

Because it sets a maximum rent price below the market equilibrium, leading to higher demand (Qdx) and lower supply (Qsx) than at equilibrium, creating a persistent shortage.

How does the price system contribute to the equilibrium in a market?

By adjusting prices in response to changes in supply and demand, leading to a balance where goods and services are produced and consumed in quantities that reflect their current market conditions.

How do prices create incentives in a market economy?

By encouraging producers to supply more at higher prices for higher profits and dissuading consumers from purchasing at higher prices, thus seeking alternatives and reducing demand.

What does |ED| indicate for vertical and horizontal demand curves?

For a vertical demand curve, |ED| = 0, indicating perfectly inelastic demand. For a horizontal demand curve, |ED| is infinite, indicating perfectly elastic demand.

How do high prices function as a rationing mechanism when demand exceeds supply in a market?

High prices act as a rationing mechanism in situations where demand exceeds supply by discouraging some consumers from purchasing the product. The higher cost makes it less affordable or less attractive for certain consumers, effectively reducing the demand. Simultaneously, these high prices incentivize producers to increase production, as the potential for higher profits exists.

What do high prices indicate in a market economy, and how do producers typically respond?

High prices in a market economy usually indicate high demand and/or low supply. This acts as a signal for producers to increase production, as they can anticipate higher profits due to the increased demand or limited supply of the goods or services.

How can we interpret the absolute value of ED, |ED|, in terms of consumer sensitivity to price changes?

If |ED| > 1, demand is relatively elastic. If |ED| = 1, demand is unit elastic. If |ED| < 1, demand is relatively inelastic.

What are the long-term consequences of government housing subsidies in the rental market?

Increased housing availability, potentially higher quality of housing due to incentives for landlords, and enhanced affordability of rental units for a broader section of the population.

How does rent control affect new housing investments?

It decreases investments in new rental properties or renovations due to lower returns imposed by rent controls.

What is the overall impact of the price system on an economy?

It guides economic decisions and resource allocations, balancing supply and demand, and ensuring that goods and services are produced and consumed in quantities that reflect their demand and supply conditions.

What does a downward sloping demand curve indicate in a market graph with a price ceiling?

It indicates that as the price decreases, the quantity demanded increases.

What does the first upward sloping dashed line indicate in the context of housing subsidies?

It indicates the original supply of rental units without subsidies, showing how the quantity supplied increases as the rent price increases.

What is indicated by the upward sloping supply curve in this context?

It indicates the relationship between price and quantity supplied, showing that as the price increases, the quantity supplied increases.

What does the upward sloping line indicate in this context?

It indicates the supply of labor by workers, showing that as the wage rate increases, more individuals are willing to offer their labor.

What effect does rent control have on the quality of rental housing?

It leads to deterioration in quality, as landlords may reduce maintenance and improvements due to lower revenue from rent.

What is the immediate effect of implementing rent control?

It makes housing more affordable for current tenants, as they pay less than the market rate.

What does price elasticity of demand measure?

It measures how the quantity demanded of a product responds to a change in its price, quantifying the percentage change in quantity demanded in response to a one percent change in price.

What are the unintended distributional effects of rent control?

It might not benefit the lowest-income renters, as landlords may prefer higher-income tenants within the price limits, who are perceived as less risky.

What does "queuing" mean in relation to price ceilings?

It refers to consumers waiting in line to purchase goods due to shortages caused by the price ceiling. This occurs because the lower price set by the ceiling increases demand, but the supply is insufficient to meet this demand, leading to situations where consumers may have to wait for long hours, such as during gasoline shortages.

What does the downward sloping line represent in a labor market graph with a minimum wage?

It represents the demand for labor by employers, showing that as the wage rate decreases, employers are more willing to hire more workers.

What does the downward sloping line represent in a rental market graph?

It represents the demand for rental units, showing that as the rent price decreases, the quantity demanded increases.

What does the downward sloping demand curve represent in a market graph with a price floor?

It represents the relationship between price and quantity demanded, showing that as the price decreases, the quantity demanded increases.

What is shown by an upward sloping supply curve in this context?

It shows that as the price increases, the quantity supplied increases.

Explain how the proportion of a consumer's budget spent on a product affects its price elasticity of demand. Include an example in your explanation.

Items that take up a smaller portion of a consumer's budget tend to have inelastic demand because changes in price have a minimal impact on the consumer's overall spending. Salt is an example where demand is inelastic, as it is a small part of most budgets.

In what way do low prices serve as a rationing mechanism when supply exceeds demand?

Low prices function as a rationing mechanism in scenarios where supply exceeds demand by encouraging more consumption. The reduced cost makes the product more accessible or appealing to a larger number of consumers, thereby increasing the demand. At the same time, low prices signal producers to reduce production, as the lower profit margins make it less viable to maintain high production levels.

What are the implications of low prices for demand and supply in a market economy, and what actions do producers generally take?

Low prices suggest that there is low demand and/or high supply for a product or service. This serves as an indicator for producers to decrease production, as the lower demand or abundant supply reduces the potential for profits.

Describe how luxury and necessity goods differ in their price elasticity of demand and provide an example for each.

Luxury goods have more elastic demand because consumers are more likely to reduce their consumption when the price increases, as these goods are not essential. For example, luxury cars have elastic demand. In contrast, necessities like basic food items have inelastic demand because consumers need these goods regardless of price changes.

Do normal goods have a positive or negative income elasticity? What about inferior goods?

Normal goods have a positive income elasticity, meaning demand increases with income. Inferior goods have a negative income elasticity, meaning demand decreases as income increases.

Is the surplus created by a price floor temporary or permanent?

Not temporary and can persist as long as the price floor is in place, often requiring additional government actions to manage the surplus.

Discuss how the length of time following a price change affects the price elasticity of demand for a product. Give an example to illustrate your point.

Over a longer time period, the price elasticity of demand for a product tends to increase because consumers have more time to adjust their behavior, find substitutes, or change their consumption habits. For example, the demand for gasoline is more elastic in the long term as people might find alternative transportation methods or more fuel-efficient vehicles.

Why is the market system also referred to as the price system?

Prices are the key signals and information mechanism coordinating economic decisions in a market economy.

What is rent control in the context of a housing market?

Rent control is a price ceiling where a local city council sets a maximum limit on the rent landlords can charge, typically below the market equilibrium rent.

Do substitute goods have a positive or negative cross-elasticity? What about complements?

Substitute goods have a positive cross-elasticity of demand, indicating an increase in the price of one leads to an increase in demand for the other. Complements have a negative cross-elasticity, indicating an increase in the price of one leads to a decrease in demand for the other.

market equilibrium

The condition in the market where the quantity demanded of a product equals the quantity supplied, establishing a state of balance at a specific price level known as the equilibrium price.

What happens at the market equilibrium point?

The demand and supply curve intersects, indicating that the quantity demanded by consumers matches the quantity supplied by producers, with no surplus or shortage.

Where is the equilibrium point in a market graph, and what does it represent?

The equilibrium point is where the demand and supply curves intersect, labeled as Pe (equilibrium price) and Qe (equilibrium quantity). It represents the balance of quantity supplied and demanded.

What occurs if a state's minimum wage is less than the federal minimum wage?

The federal minimum wage applies. Employers in that state must pay at least the federal minimum wage.

When did the federal minimum wage begin in the U.S.?

The federal minimum wage in the U.S. was first established in 1938 under the Fair Labor Standards Act.

What happens when a state's minimum wage is higher than the federal minimum wage?

The higher state minimum wage applies within that state. Employers in that state are required to pay at least the state's minimum wage.

Where is the minimum wage set in relation to the market equilibrium, and why?

The minimum wage is set above the market equilibrium wage. It is a legally mandated minimum price for labor, established to ensure a minimum standard of living for workers and protect them from exploitation.

: How does the availability of substitutes influence the price elasticity of demand for a product? Provide an example.

The more substitutes that are available for a product, the more elastic the demand becomes because consumers can easily switch to alternatives if the price of the product increases. For instance, the demand for soft drinks is considered elastic due to the wide variety of beverages consumers can choose from as substitutes.

Equilibrium Price (Pe)

The price at which the quantity of a product demanded by consumers equal the quantity supplied by producers, indicating a stable market condition.

Equilibrium Quantity (Qe)

The quantity of goods or services that is supplied and demanded at the equilibrium price.

Is the shortage created by a price ceiling temporary or permanent?

The shortage is often permanent as long as the price ceiling is maintained, as it disrupts the natural market equilibrium.

What is the difference between the slope of a demand curve and the elasticity of demand along the curve?

The slope measures the rate of change in quantity demanded for a unit change in price and depends on units of measurement. Elasticity measures the percentage change in quantity demanded relative to a percentage change in price, making it unitless and a universal measure of responsiveness.

What effect do government housing subsidies have on the rental market equilibrium?

The subsidies create a new equilibrium (blue point) at a lower price and higher quantity of rental units than the original equilibrium (orange point), indicating that the average rent decreases and more housing becomes available.

How is the subsidized supply of rental units depicted in the graph?

The subsidized supply is depicted as a second upward sloping solid line, shifted to the right. This shift represents an increase in the quantity of rental units supplied at every price level due to government subsidies.

What is measured on the x-axis and y-axis in a labor market graph?

The x-axis represents the quantity of labor (number of workers or hours worked), and the y-axis represents the wage rate (price of labor per hour).

What role do "ration coupons" play under a price ceiling?

They are used to distribute scarce goods more evenly among consumers when a price ceiling leads to shortages. These coupons allow the holder to purchase a specified quantity of the scarce good, ensuring that everyone gets at least some portion of the product, rather than distribution being based solely on willingness or ability to pay. Ration coupons have been historically used during times of war or significant supply disruptions.

What role do prices play in terms of information in a market economy?

They provide information about the relative scarcity of goods and services.

What are "favored customers" in the context of a price ceiling?

Those who receive preferential treatment from suppliers in a market with a price ceiling, often leading to unequal access to limited goods.These customers might be regular clients, friends, or others who offer some advantage to the supplier. This leads to an unequal distribution of scarce goods, where not everyone has equal access to the product despite its lower price.

How does demand elasticity affect total and marginal revenue?

When demand is elastic, an increase in price decreases total revenue. When demand is inelastic, an increase in price increases total revenue. Total revenue is unchanged by a price change when demand is unit elastic. Marginal revenue follows a similar pattern: positive when demand is elastic, negative when inelastic, and zero when unit elastic.

What is represented by the market equilibrium point (Pe) in a labor market graph?

Where the demand and supply curves intersect, indicating the balance of labor demanded and supplied at the equilibrium wage rate.

What does the equilibrium point (Pe) represent in a market graph?

Where the demand and supply curves intersect, indicating the market balance of quantity supplied and demanded at the equilibrium price.

What is elasticity in economics?

a measure of how sensitive one variable is to a change in another variable.

What is income elasticity of demand, and how is it measured?

measures how the quantity demanded of a good responds to a change in consumers' income, calculated as the percentage change in quantity demanded divided by the percentage change in income.

What is cross-elasticity of demand and how is it measured?

measures how the quantity demanded of one good responds to a change in the price of another good, calculated as the percentage change in quantity demanded of one good divided by the percentage change in the price of another good.

What are the long-term consequences of rent control in a community?

reduced supply of rental housing, deterioration in housing quality, decreased investment in new housing, misallocation of housing, potential gentrification and displacement, development of a black market, and reduced mobility among renters.

What is the rule if a state does not have its own minimum wage law?

the federal minimum wage applies. Workers in that state are guaranteed to receive at least the federal minimum wage as a baseline.

How does |ED| change along a downward-sloping linear demand curve?

|ED| is > 1 (elastic) at higher prices and lower quantities, = 1 (unit elastic) at the midpoint, and < 1 (inelastic) at lower prices and higher quantities. Elasticity decreases as we move down the curve.

How do you calculate the price elasticity of demand using the midpoint formula?

|Ed| = ((Q2 - Q1) / ((Q1 + Q2) / 2)) / ((P2 - P1) / ((P1 + P2) / 2))