question
Who said ""It is not the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest."
answer
Adam Smith
question
Adam Smith believed in [lot of government/little government] involvement.
answer
Little government involvement
question
Who first used the term "invisible hand?"
answer
Adam Smtih
question
What does the "invisible hand" mean?
answer
There are "invisible" factors that control the market, market price, supply, demand, etc. There should be little government intervention in the economy.
question
A collection of buyers and sellers of a particular product.
answer
Market
question
A market doesn't have to be a ________.
answer
physical place
question
A market with many buyers and sellers, each has a small impact on price.
answer
Competitive market
question
What 2 criteria are required for a perfectly competitive market?
answer
1. All goods are exactly the same.
2. Buyers and sellers are so numerous that no one can affect market price - each is a "price taker."
2. Buyers and sellers are so numerous that no one can affect market price - each is a "price taker."
question
Someone who doesn't affect the price. They must accept the price set by the market.
answer
Price taker
question
A market in which either the buyer or the seller can influence the market price.
answer
Imperfect market
question
When sellers produce goods and services that are different from their competitors', they gain some control on _______.
answer
price
question
What is an example of an imperfect market?
answer
The web search market. Google controls 67% of the web search market.
question
Thanks to their secret algorithm, they control 67% of the web search market.
Microsoft and Yahoo, but they own just 18% and 11% of the market, respectively. This is an example of...
Microsoft and Yahoo, but they own just 18% and 11% of the market, respectively. This is an example of...
answer
an imperfect market.
question
Which of the following is a competitive market (2 answers)?
A. Gas stations at a busy interstate exit
B. A furniture store in an isolated small town
C. A fresh produce stand at farmers' market
A. Gas stations at a busy interstate exit
B. A furniture store in an isolated small town
C. A fresh produce stand at farmers' market
answer
A. Gas stations at a busy interstate exit (there are many stations with relatively similar prices)
C. A fresh produce stand at farmers' market
C. A fresh produce stand at farmers' market
question
What are the 2 factors that influence the market?
answer
Demand
Supply
Supply
question
The amount of the good that buyers are willing and able to purchase.
answer
Quantity demanded
question
The claim that the quantity demanded of a good decreases when the price of the good rises, other things being equal, vice- versa.
answer
Law of demand
question
A table that shows the relationship between the price of a good and the quantity demanded.
answer
Demand schedule
question
The quantity demanded in the market is the sum of the quantities demanded by ________ at each price.
answer
all buyers
question
Latin word that means "all else equal."
answer
Ceteris Paribus
question
What is the y axis of a demand curve?
answer
Price
question
What is the x axis of the demand curve?
answer
Quantity demanded
question
The quantity demanded curve has a _______ slope.
answer
negative
question
According to the demand curve, a change in price changes the...
answer
quantity demanded
question
Other factors that affect demand (not price) will ____ the entire demand curve.
answer
shift
question
What are the 5 most important non-price determinants of demand?
answer
Preferences
Number of buyers
Incomes
Expectations
Price of related goods
Number of buyers
Incomes
Expectations
Price of related goods
question
When demand increases, the demand curve shifts to the ____.
answer
right
question
When demand decreases, the demand curve shifts to the ____.
answer
left
question
Increase in the number of _____ increases quantity demanded at each price, shifts D curve to the right.
answer
buyers
question
Decrease in the number of buyers decreases quantity demanded at each price, shifts D curve to the _____.
answer
left
question
Any goods for which demand
increases when income increases.
increases when income increases.
answer
Normal goods
question
Goods for which demand decreases when income increases.
answer
Inferior goods
question
For _____ goods, an increase in income causes an increase in quantity demanded, so the demand curve shifts to the right.
answer
normal
question
For inferior goods, an increase in income causes a _______ in quantity demanded at each price, so the demand curve shifts to the left.
answer
decrease
question
Two goods are _______ if
an increase in the price of one
causes an increase in demand for the other.
an increase in the price of one
causes an increase in demand for the other.
answer
substitutes
question
What are examples of substitutes?
answer
Pizza and hamburgers
question
Two goods are ________ if
an increase in the price of one causes a fall in demand for the other.
an increase in the price of one causes a fall in demand for the other.
answer
complements
question
What are examples of complements?
answer
iPhone and iPhone case
question
Anything that causes a shift in __________ toward a good will increase demand for that good
and shift its D curve to the right.
and shift its D curve to the right.
answer
preferences
question
If people expect their incomes to rise, their _____ for meals at expensive restaurants may increase now.
answer
demand
question
If the economy sours and people worry about their future job security, demand for new cars may ____ now.
answer
decrease
question
When a grocery store has a sale on paper and people buy more, which increases: quantity demanded or demand?
answer
quantity demanded
question
Oliver just brought home a new kitten. We could expect Oliver's demand for...
answer
cat toys, a complementary good, to increase.
question
Wendell just read an article that says scientists have proven that processed cheese food increases brain power. We would expect Wendell's demand for processed cheese food to:
answer
increase and shift to the right.
question
The amount that sellers are willing and able to sell.
answer
Quantity supplied
question
The claim that the quantity supplied of a good increases when the price of the good increases, other things being equal.
answer
Law of Supply
question
A table that shows the relationship between the price of a good and the quantity supplied.
answer
Supply schedule
question
What's the slope of a supply curve?
answer
Positive
question
What are the 5 non-price determinants of supply?
answer
Technology
Number of producers
Price of inputs
Expectations
Price of related goods
Number of producers
Price of inputs
Expectations
Price of related goods
question
When a non-price determinant positively affects supply, the supply curve shifts to the...
answer
right
question
A cost-saving technological improvement has the same effect as a fall in input prices,
shifts S curve to the...
shifts S curve to the...
answer
right
question
________ determines how much inputs are
required to produce a unit of output.
required to produce a unit of output.
answer
Technology
question
A _______ in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right.
answer
decrease
question
An ________ in the number of sellers increases the quantity supplied at each price, shifts S curve to the right.
answer
increase
question
What happens to a supply curve if:
"Retailers cut the price of the software."
"Retailers cut the price of the software."
answer
The supply curve remains the same.
question
What happens to a supply curve if:
"A technological advance allows the software to be produced at lower cost."
"A technological advance allows the software to be produced at lower cost."
answer
The supply curve shifts to the right.
question
The price that equates quantity supplied with quantity demanded. Where the demand curve and supply curve intersect.
answer
Equilibrium price
question
The quantity supplied and demanded at the equilibrium price. Where the demand curve and supply curve intersect.
answer
Equilibrium quantity
question
When quantity supplied is higher than quantity demanded.
answer
Surplus
question
Measure of how the quantity demanded changes in response to a change in price.
answer
Price elasticity of demand
question
Measures how much one variable responds to changes in another variable. A numerical measure of the responsiveness of Qd or Qs to one of its determinants.
answer
Elasticity
question
The response of consumers to a change in price. The percentage change in quantity demanded divided by the percentage change in price.
answer
Price elasticity of demand
question
___________ elasticities (in absolute value) imply greater sensitivity and responsiveness.
answer
Larger
question
How do you find elasticity?
answer
%Qd/%P
%Qd = Qnew-Qold/Qold * 100
%P = Pnew-Pold/Pold * 100
%Qd = Qnew-Qold/Qold * 100
%P = Pnew-Pold/Pold * 100
question
What does a perfectly elastic point look like on a graph?
answer
Qd = 0
y intercept
y intercept
question
What does a perfectly inelastic point look like on a graph?
answer
P = 0
x intercept
x intercept
question
What does a unit elastic point look like on a graph?
answer
It is the midpoint between x and y intercept (perfectly elastic and perfectly inelastic). Elasticity = 1
question
What are 4 determinants of price elasticity of demand?
answer
Availability of close substitutes
Necessities vs luxuries
Broadly vs narrowly defined markets
Time horizon
Necessities vs luxuries
Broadly vs narrowly defined markets
Time horizon
question
Price elasticity is _________ when close substitutes are available.
answer
higher
question
Price elasticity is higher when the share of the budget spent on the good is ________.
answer
higher
question
Price elasticity is ______ for narrowly defined goods than for broadly defined ones.
answer
higher
question
Price elasticity is ________ for luxuries than for necessities.
answer
higher
question
Price elasticity is higher in the ____ run than the ____ run.
answer
higher in the long run than short run.
question
In the short run, you are ________ to price changes.
answer
inelastic
question
Demand for which quantity demanded remains the same regardless of price; represented by a vertical line.
answer
Perfectly inelastic
question
Demand for which any increase in price will cause quantity demanded drop to zero, represented by a horizontal line.
answer
Perfectly elastic
question
When the price elasticity is 1, this is called...
answer
unit elastic demand
question
When price elasticity is less than 1, it is called...
answer
inelastic demand
question
When price elasticity is greater than 1, it is called...
answer
elastic demand
question
The demand curve for elastic demand is relatively...
answer
flat
question
The demand curve for inelastic demand is relatively...
answer
steep
question
What is the demand curve for perfectly elastic demand?
answer
horizontal
question
What is the percentage change formula?
answer
end value - start value / start value * 100
question
What is the midpoint method?
answer
end value - start value / midpoint * 100
question
Suppose that the price of candy bars increases by 100%. As a result of this, you decide to purchase 50% fewer candy bars. How would you describe your demand for candy bars?
answer
The demand is inelastic.
question
True or False:
Since demand is a downward sloping line, with a constant slope; elasticity on demand curve does not change.
Since demand is a downward sloping line, with a constant slope; elasticity on demand curve does not change.
answer
False
question
True or False:
Elasticity is defined in terms of $/unit.
Elasticity is defined in terms of $/unit.
answer
False, it's just a number with no units.
question
True or False:
Demand is much more "elastic" for inexpensive items on sale.
Demand is much more "elastic" for inexpensive items on sale.
answer
False
With these items, the price is still very cheap, regardless of the small change. So the small change in price does not prompt a response from the consumer.
With these items, the price is still very cheap, regardless of the small change. So the small change in price does not prompt a response from the consumer.
question
True or False:
Price elasticity is higher for narrowly defined goods than broadly define ones.
Price elasticity is higher for narrowly defined goods than broadly define ones.
answer
True
question
True or False:
Price elasticity is "lower" for luxuries than necessities.
Price elasticity is "lower" for luxuries than necessities.
answer
False
You can't stop buying necessities if the prices increase.
You can't stop buying necessities if the prices increase.
question
True or False:
Price elasticity is higher in the short run than the long run.
Price elasticity is higher in the short run than the long run.
answer
False
If you need the item then, you are more willing to pay any price.
If you need the item then, you are more willing to pay any price.
question
What are the 2 effects that a price increase has on revenue (revenue = price * quantity)?
answer
1. Higher price means more revenue on each unit you sell.
2. But you sell fewer units (lower Q), due to the law of demand.
2. But you sell fewer units (lower Q), due to the law of demand.
question
Which two factors (Higher price means more revenue on each unit you sell, but you sell fewer units due to the law of demand)has a larger effect on the revenue?
answer
It depends on the price elasticity of the demand.
question
If the demand is elastic, the fall in revenue from lower quantity is __________ than the increase in the revenue from the higher price.
answer
greater
question
If the demand is elastic, the fall in revenue from lower quantity is greater than the increase in the revenue from the higher price, so revenue...
answer
falls
question
When price elasticity is >1, which factor (quantity or price) will have a larger effect on revenue?
answer
Quantity
question
Revenue =
answer
Price * Quantity
question
With inelastic demand, the fall in revenue from lower quantity is _______ than the increase in revenue from higher price.
answer
less
question
With inelastic demand, the fall in revenue from lower quantity is less than the increase in revenue from higher price, so revenue...
answer
rises
question
When price elasticity is <1, revenue will _____ with an increase in price.
answer
increase
question
Suppose a firm is selling a product at a price on the "elastic" portion of the demand line. This firm could increase revenue by:
answer
lowering the price, selling more of the item.
question
Firms will produce more output when prices go up.
answer
Law of supply
question
Price elasticity of supply relates the percentage changes in the __________ to percentage changes in _________.
answer
quantity supplied
price
price
question
Measures how much Qs responds to a change in P.
answer
Price elasticity of supply
question
Loosely speaking, price elasticity of supply measures sellers' __________.
answer
price-sensitivity
question
What are 2 factors that determine the price elasticity of supply?
answer
Flexibility of the production process
Time adjustment (short run vs long run)
Time adjustment (short run vs long run)
question
Flexibility of sellers to change the amount of the good they produce.
answer
Flexibility of the production process
question
What has a more flexible production process, farmers or a company that produces parts for Toyotas?
answer
Farmer
question
In the short run, what is the price elasticity of supply?
answer
It is mostly inelastic. The firms cannot easily change their production in the short run.
question
In the long run, what is the price elasticity of supply?
answer
Mostly elastic
question
With a perfectly inelastic product for price elasticity of supply, what does the graph look like?
answer
Graph is vertical
question
What does the graph look like for the elasticity of supply for a perfectly elastic good?
answer
horizontal
question
When elasticity of supply or demand equals one, the good is said to be...
answer
unit elastic
question
Measures the response of Qd to a change in consumer income.
answer
Income elasticity of demand
question
An increase in income causes an increase in demand for a ______ good.
answer
normal
question
For normal goods, income elasticity is [< or >] 0.
answer
>0 (positive)
question
For inferior goods, the income elasticity is [< or >] 0.
answer
<0 (negative)
question
Measures the response of demand for one good to changes in the price of another good.
answer
Cross-price elasticity of demand
question
Cross price elasticity of demand =
answer
% change in Qd for good 1 / % change in price of good 2
question
income elasticity of demand =
answer
% change in quantity demanded / % change in income
question
For substitutes, cross price elasticity is [positive/negative].
answer
positive
question
For complements, cross-price elasticity is [positive/negative].
answer
negative
question
In history, government interventions through price controls have been [successful/unsuccessful].
answer
unsuccessful
question
What are the 2 types of price controls?
answer
price ceilings and price floors
question
Legal maximum on the price of a good or service.
answer
price ceiling
question
Legal minimum on the price of a good or service.
answer
price floor
question
Rent control is an example of...
answer
price ceiling
question
The minimum wage is an example of...
answer
price floor
question
What are the 2 types of price ceilings?
answer
Binding and non-binding
question
When the price ceiling is above the equilibrium price, the ceiling is said to be...
answer
non-binding
question
When the price ceiling is below the equilibrium price, the ceiling is said to be...
answer
binding
question
For rent control, is the shortage greater or lesser in the short run?
answer
Lesser because the supply and demand are inelastic in the short run.
question
What are 2 rationing mechanisms?
answer
Long lines
Discrimination according to sellers' biases.
Discrimination according to sellers' biases.
question
When prices are not controlled, the rationing mechanism is _________ (the goods go to the buyers that value them the most) and ________ (fair).
answer
efficient and impersonal
question
Laws that place a temporary ceiling on prices.
answer
Price gouging laws
question
What are 3 problems with price gouging laws?
answer
1. Restricted prices can't ration efficiently.
2. Resources may not go where they are
needed the most.
3. Goods that people need disappear due to severe shortages.
2. Resources may not go where they are
needed the most.
3. Goods that people need disappear due to severe shortages.
question
A binding price ceiling will result in a ________.
answer
shortage
question
A binding price floor will result in a __________.
answer
surplus
question
Supply and demand are _______ in the long run for rent control.
answer
elastic
question
Supply and demand are _______ in the short run for rent control.
answer
inelastic
question
A tax on buyers will shift the ______ curve to the left.
answer
demand
question
The manner in which the burden of a tax is shared among market participants.
answer
Incidence of a tax
question
What are the steps for finding out the tax incidence on a tax on consumers?
answer
1. Draw the tax wedge that is as large as the tax.
2. Find the new equilibrium price and quantity.
3. Subtract the demand 1 curve from the old equilibrium price. This is the tax paid by the consumers.
4. Subtract the old equilibrium price from the new equilibrium price. This is the tax paid by the sellers.
2. Find the new equilibrium price and quantity.
3. Subtract the demand 1 curve from the old equilibrium price. This is the tax paid by the consumers.
4. Subtract the old equilibrium price from the new equilibrium price. This is the tax paid by the sellers.
question
A tax on sellers will shift the ______ curve to the left.
answer
supply
question
Compare the effect of a tax on the buyers and the effect of a tax on the sellers.
answer
It is the same. The new equilibrium price, equilibrium quantity, and tax incidence is the same regardless of who is taxed.
question
A _______ drives a wedge between the price buyers pay and the price sellers receive.
answer
tax
question
Taxes discourage market activity. When a good is taxed, the quantity of the good sold is _______ in the new equilibrium.
answer
smaller
question
Buyers and sellers share the burden of ______. In the new equilibrium, buyers pay more for the good, and sellers receive less.
answer
taxes
question
Tax incidence is not affected by whether the government makes ___________ pay the tax.
answer
buyers or sellers
question
________ determines tax incidence.
answer
Elasticity
question
When supply is more elastic than demand, what happens in the market with tax incidence?
answer
It's easier for sellers than buyers to leave the market, so buyers bear most of the burden of the tax.
question
When demand is more elastic than supply, what happens in the market with tax incidence?
answer
It's easier for buyers than sellers to leave the market, so sellers bear most of the burden of the tax.
question
When the buyers' share of the tax burden is more than the sellers' share, what does that mean about the elasticity?
answer
Supply is more elastic than demand.
question
When the buyers' share of the tax burden is less than the sellers' share of the tax burden, what does that mean about the elasticity?
answer
Demand is more elastic than supply.
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