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