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Micro Test 4
Terms in this set (140)
Group of buyers and sellers of a particular good or service
Market in which there are many buyers and sellers such that each has a negligible impact on the price
Amount of a good that buyers are willing and able to purchase
The claim that, all else equal, the quantity demanded falls when the price rises
Law of Demand
The demand curve is _ sloping
A table that shows the relationship between quantity demanded and price
A graph of the relationship between quantity demanded and price
What is the difference between aggregate demand and quantity demanded?
Quantity demanded is each individual's demand, and aggregate demand is the sum of individual demands for a particular good or service
A aggregate demand schedule and curve will have more than one quantity/consumer
Factors that influence demand
Price of related goods
Number of buyers
An increase in income causes an _ in the demand for a normal good
An increase in income causes a _ in the demand for an inferior good
As the price of a substitute increases, the demand for the good _
As the price of a complement increases, the demand for the good _
An increase in the consumers' taste for a good will cause a _ in demand for that good
An increase in future income causes an _ in demand today (for a normal good)
An increase in buyer population causes an _ in demand
Amount of a good sellers are willing and able to sell
The claim that, all else equal, the quantity supplied of a good increases as price increases
Law of Supply
A table that shows the relationship between price of a good and quantity supplied
A graph of the relationship between the price of a good and quantity supplied
A market supply curve is a combination of supply curves, so take the _
What causes a shift in supply?
Change in technology
Number of sellers
An increase in the price of an input will _ supply
An increase (improvement) in tech will _ supply
An increase in future expected price will _ supply today
An increase in the number of sellers will _ supply
A situation in which price has reached a level in which quantity supplied is equal to quantity demanded
Price where quantity supplied is equal to quantity demanded
The quantity supplied and quantity demanded at equilibrium price
A situation where quantity supplied is greater than quantity demanded (due to a too high price)
A situation where quantity demanded is greater than quantity supplied (due to a too low price)
The claim that the price of any good adjusts to bring the quantity supplied and quantity demanded for that good into balance
Law of Supply and Demand
Do practice problems online!!!
A measure of how the quantity demanded of a good responds to a change in the price of that good
Price elasticity of demand
% change in quantity demanded / % change in price
If E > 1...
If E < 1...
If E = 1....
Factors that influence elasticity
Availability of close substitutes
Necessity vs luxury
Definition of the market
More substitutes means...
Necessary goods are...
Luxury goods are...
Narrow markets are...
More time means...
Average E formula
(change in quantity demanded / quantity average) / (change in price / price average)
If % change in q > % change in p...
If % change in q < % change in p...
If % change in q = % change in p...
Does the price elasticity of a linear demand curve equal its slope?
Will accept one quantity at any price
Will accept any quantity but at one price
More inelastic means a _ curve
More elastic means a _ curve
If demand is elastic (E>1), and price increases and Qd decreases more, what happens to total revenue?
If demand is unit elastic, (E=1), and price increases and quantity demanded decreases by the same amount, what happens to total revenue?
If demand is inelastic (E<1), and price increases and Qd decreases by less, what happens to total revenue?
What happens to total revenue if price decreases?
Total revenue =
P x Q
Why do we take the absolute value of price elasticity of demand?
Since we know the demand curve is downward sloping, the sign doesn't tell us anything
Responsiveness of demand when income changes
Income elasticity of demand
Income E of D formula (sign matters)
% change in Qd / % change in income
For a normal good, when income increases, elasticity is...
Positive (Qd increases)
For an inferior good, when income increases, elasticity is...
Negative (Qd decreases)
Responsiveness of demand when price of another good changes
Cross price E of D
Eab (cross price) =
% change in QdA / % change in QdB
The sign for cross price tells us what?
If A and B are substitutes or complements
If A and B are substitutes, when the Pb increases, Qa increases, so Eab...
> 0 (positive)
If A and B are complements, when Pb increases, Qa decreases so Eab...
< 0 (negative)
Measure of how quantity supplied of a good responds to a change in the price of that good
Price E of Supply
% change in Qs / % change in P
(change in Qs / Qs avg) / (change in P/P avg)
The sign for Es tells us what?
We know its always positive
Practice if P decreases
A legal maximum on price at which a good can be sold
A price ceiling is binding if it is set _ current equilibrium
A legal minimum on the price at which a good can be sold
A price floor is binding if it is set _ equilibrium
The manner in which the burden of a tax is shared among the participants in the market
Taxes decrease the WTP curve, so the demand curve _
Taxes _ market activity
Both _ and _ bear the tax burden
The burden doesn't matter which one it is imposed on, tax incidence will still be the _
The more inelastic you are, the _ burden you bear
Max amount the buyer is willing to pay for the good (demand)
Willingness to pay
The buyer's WTP minus the amount they actually pay
The value of everything the seller gives up to produce the good
Amount the seller is paid minus their cost
Consumer surplus + Producer surplus
A measure of society's economic well-being
The property of resource allocation such that total surplus received by all members of society is maximized
Free markets allocate goods to those who...
Value them most/have the highest WTP
Free markets allocate demand for goods to those who...
Can produce them at least cost
Free markets produce the quantity of goods that...
Maximize the sum of consumer and producer surplus
More elasticity means _ DWL
Losses contributed to society by market inefficiency
What would happen to the equilibrium price and quantity in the bicycle market if there were an increase in both the supply and the demand for bicycles?
P is ambiguous
T/F: if apples and oranges are substitutes, an increase in the price of apples will decrease the demand for apples
It will increase
If the price of a good is above the equilibrium price, there is a _, and the price will _
If the price of a good is below the equilibrium price, there is a _, and the price will _
When demand is more _, DWL is smaller
When supply is more _, DWL is smaller
As size of tax increases, DWL _
As size of tax increases, tax revenue first _ then _
T/F: If the quantity demanded of a good is sensitive to a change in the price of that good, demand is said to be price inelastic
T/F: The demand for aspirin this month should be more elastic than the demand for aspirin this year
More time = more elasticity
T/F: If the cross-price elasticity of demand between two goods is positive, the goods are likely to be complements
T/F: If a demand curve is linear, the price elasticity of demand is constant along it
Demand will be price elastic in its upper portion and price inelastic in its lower portion
If a small percentage increase in the price of a good greatly reduces the quantity demanded for that good, the demand for that good is...
If the cross-price elasticity between two goods is negative, the two goods are likely to be...
If an increase in the price of a good has no impact on the total revenue in that market, demand must be...
Unit price elastic
Technological improvements in agriculture that shift the supply of agricultural commodities to the right tend to _ total revenue to farmers as a whole bc demand for food is _
The study of how allocation of resources affects economic well-being
The property of a resource allocation of maximizing the total surplus received by all members of society
The property of distributing prosperity uniformly among members of society
Producer surplus is a measure of the _ of market participation to the sellers
Free markets allocate to buyers who have a WTP _ the price
T/F: Equilibrium in a market maximizes total surplus
Consumer surplus can be found where?
Below the demand curve and above the price
Producer surplus can be found where?
Above the supply curve and below the price
If a benevolent social planner chooses to produce less than the equilibrium quantity of a good, then the _ exceeds the cost of production
Value placed on the last unit of production by buyes
If a benevolent social planner chooses to produce more than the equilibrium quantity of a good, then the _ on the last unit produced exceeds the value placed on it by buyers
Cost of production
Total surplus can be found where?
Below the demand curve and above the supply curve
Adam Smith's invisible hand concept suggests that a competitive market outcome _ total surplus
In general, if a benevolent social planner wanted to maximize the total benefits received by buyers and sellers in the market, the planner should do what?
allow the market to seek equilibrium on its own
If buyers are rational and there is no market failure, then free market solutions are _ and free market solutions _ total surplus
If a producer has market power, then free market solutions are _
If a market is efficient, then the market allocates output to buyers who _, allocates buyers to sellers who can _, and the quantity produced in the market _ the sum of CS and PS
Value it the most
Produce it at the least cost
The manner in which the burden of a tax is shared among participants in the market
The difference between what the buyer pays and the seller receives after a tax has been imposed
A price ceiling set below the equilibrium causes a _
The ultimate burden of a tax lands most heavily on the side that is _ elastic
When we use the model of supply and demand to analyze a tax collected from the buyers, we shift the demand curve _ by the size of the tax
Which side of the market is more likely to lobby gov for a price floor?
The burden of a tax falls more heavily on the buyers in a market when demand is _ and supply is _
The reduction in total surplus that results from a tax
A graph showing the relationship between the size of a tax and the tax revenue collected
When a tax is placed on a good, the revenue the government collects _ the loss of consumer and producer surplus from the tax
The difference is DWL
Loss in total surplus = _ - _
Cost to the seller
A tax will generate a greater DWL if supply and demand are _
Suppose the supply of diamonds is relatively inelastic. A tax on diamonds would generate a _ deadweight loss and the burden of the tax would fall on the _ of diamonds
Recommended textbook explanations
Principles of Economics
N. Gregory Mankiw
Economics: Principles in Action
Arthur O'Sullivan, Steven M. Sheffrin
Arthur O'Sullivan, Steven M. Sheffrin
Principles of Economics
N. Gregory Mankiw
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