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Law of Demand

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as price increases, quantity demanded decreases, or as price decreases, Qd rises, holding all other variables constant

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Income elasticity of demand formulas

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1. P(given price) - A(P-int)/P(given price) or 2. (DeltaQd/DeltaP) (P/Q)

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For demand to exist, what must there be?

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A. Desire for good. B. Able to pay for it. C. Immediate plans to purchase.

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Quantity Demanded

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how much of a good or service consumers are willing and able to purchase at a given price

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Generalized demand function

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Q_d = f (P, M, P_r, T, P_E, N) = a + bP + cM + dP_R + eT + fP_E + gN

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What is the sign of the price coefficient b in Qd?

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b < 0, because of the law of demand.

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What is the sign of the income coefficient c in Qd for normal goods?

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c > 0

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If the sign of the income coefficient c for Qd is < 0, what does it mean

answer

c is negative (less than 0) if M is an inferior good.

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If d, Pr's coefficient for related goods in consumption, is < 0, what does that mean?

answer

The related good is a complement since its price is inversely related to the Qd of good A.

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If d, Pr's coefficient, is greater than zero, what does that mean?

answer

The related good is a substitute, as a rise in the price of the good will increase the Qd.

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Should e, the cofficient of T (Taste) be < or > 0

answer

e should be > 0

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What is a direct demand function?

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Qd = F(p). Qd expressed as a function of price

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What is an inverse demand function?

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Price expressed as a function of Qd; P = f(Qd)

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Quantity Supplied

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the amount of a good or service that a firm is willing and able to supply at a given price

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Excess Demand (Shortage)

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when quantity demanded is more than quantity supplied

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Excess Supply (surplus)

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when Qs > Qd

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Market equilibrium

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Price at which the Qd = Qs

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When is demand elastic?

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When |E| > 1

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When is demand inelastic

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|E| < 1

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When is demand unit elastic?

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When |E| = 1

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When is demand perfectly elastic?

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Demand is perfectly elastic when any price increase will cause the quantity demanded to drop to zero. When demand is perfectly elastic, the demand curve is a horizontal line. E = 0

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When is demand perfectly inelastic?

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Demand is perfectly inelastic when the quantity demanded does not respond at all to changes in the price. When demand is perfectly inelastic, the demand curve is a vertical line. E = inf.

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Factors affecting elasticity

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% of income spent on good. 2. Availability of substitutes (more there are, the more elastic demand is). 3. Time Period of Adjustment (Gen., more time to respond to price change, greater elasticity)

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Does elasticity of demand change when the curve is linear?

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Elasticity varies along a linear curve

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If demand is of the following form, Qd = aP^b, how do you find E?

answer

For such a formula, E = b

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How do find total revenue?

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Multiple price times quantity. TR = P x Q

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How do you find marginal revenu

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Take the derivative of the demand curve

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How steep marginal rev

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twice as steep as the demand curve

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If demand is elastic, P and TR

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move in the opposite directions

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If demand is inelastic, P and TR

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move in the same directions

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If demand is unit elastic,

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TR is maximized

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If demand is elastic, MR is and TR

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MR > 0 and TR increases with Q.

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if demand is unit elastic, MR = _ and TR

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MR = 0 and TR max

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If demand is inelastic, MR is _ and TR...

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MR < 0 and TR decreases with Q

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Income elasticity of demand

answer

ChangeQ/ChangeM (M/Q)

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What is elasticity of a normal good?

answer

E_M > 0

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What is elasticity of an inferior good?

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E_M < 0

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cross-price elasticity of demand formula

answer

(Changein_Qx/ChangeinPr) (Pr/Qx)

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Generalized Supply Function

answer

Qs = f( P, P_I, P_r, T, P_E, F) =

h + kP + lP_i +mP_R+ nT + rP_E + sF

h + kP + lP_i +mP_R+ nT + rP_E + sF

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What is the relationship between price and quantity supplied? What is the value of k?

answer

Direct (k > 0)

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What is the relationship between price of inputs and quantity supplied? What is the value of l?

answer

l < 0 (there is an indirect relationship

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What should is the relationship between the price of a related good and quantity supplied for substitutes in production? What is the value of m?

answer

Inverse for substitutes in production (m < 0)

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What is the relationship between the price of a related good and quantity supplied for complements in production? What is the value of m?

answer

Direct for complements in production (m > 0).

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What is the relationship between technology and quantity supplied? What is the value of n?

answer

Direct; n > 0.

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What is the relationship between the expected future price and quantity supplied? What is the value of r?

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Inverse; r < 0 (the higher it is expected to be later, less firms want to sell NOW).

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What is the relationship between the number of firms and quantity supplied? What is the value of s?

answer

Direct; s > 0.