Business Economics Demand, Supply, and Market Equilibrium Thomas & Maurice, Chapter 2. Demand and Supply on Perfectly Competitive Markets.

Size: px
Start display at page:

Download "Business Economics Demand, Supply, and Market Equilibrium Thomas & Maurice, Chapter 2. Demand and Supply on Perfectly Competitive Markets."

Transcription

1 Business Economics Demand, Supply, and Market Equilibrium Thomas & Maurice, Chapter 2 Demand and Supply on erfectly Competitive Markets Herbert Stocker IIS, Ramkhamhaeng University & Department of Economics, University of Innsbruck herbert.stocker@uibk.ac.at Demand Demand: A Thought Experiment uantity Demanded: is the amount of a good that buyers are willing and able to purchase, and is represented by a functional relationship between the price of a good or service and the quantity demanded by consumers at a given time, all else held constant Suppose, twenty people in the lecture hall received a voucher for a lunch in a restaurant They would like to sell their vouchers One starts announcing a high price and ask the people without vouchers, how many vouchers they are willing to buy for this price Lower prices are announced until everyone can sell his/her voucher

2 Demand: A Thought Experiment D S S D Demand: A Thought Experiment What are the determinants of demand? Apparently the price of the voucher Financial possibilities (income, wealth) The price of alternatives (e.g., lunch at other restaurants) Other conditions: temperature, season And many more... More systematically... Determinants of Demand D Determinants of Demand rice (): [ D ; Exception: Giffen-Goods] Income (M): [M D ; Exc.: Inferior goods] rice of Substitute Goods (S): [S D ] rice of Complementary Goods (C): [C D ] Expected rice (E) Tastes (I) Income distribution,... D = (,M,S,C,E,I,...), D < 0 D M 0 D S > 0 D C < 0 D 0 D E I 0 D = (,M,S,C,...) D < 0; D M 0; D S Example: D > 0; < 0 C D = 1, M +0.3S 1.5C D = 5; D M = +2; D S = +0.3; D C = 1.5

3 Demand Curve Inverse Demand Curve Direct demand curve ( demand ) expresses quantity demanded as a function of product price only D = f(, M, S, C) = f() Note: Demand function relates the quantities demanded to various prices, holding constant the effects of income, related prices,... ceteris paribus (c.p.) rice () is usually plotted on the vertical axis & quantity demanded ( D ) is plotted on the horizontal axis Therefore, the equation plotted is the inverse demand function D = f() = f 1 ( D ) Example: D = = D Demand Curve: Interpretation Supply A point on a demand curve shows either the maximum amount of a good that will be purchased for a given price (direct demand), or the maximum price consumers will pay for a specific amount of the good (inverse demand) In the example before: At = 100, D = 1, = 500 At D = 500, = = 100 uantity supplied... is the quantity supplied is the amount of a good that sellers are willing and able to sell, and is represented by a functional relationship between the price of a good or service and the quantity supplied by sellers in a given time, all else held constant

4 Determinants of Supply S rice (): [ S ] Input prices (I): [I S ] Technology (T): [T S ] Expected rice (E) Number of suppliers (N): [N S ] rices of goods related in production,... S = (,I,T,E,N,...) S > 0, S I < 0, S T S > 0, 0, S E N > 0 Supply Curve and Inverse Supply Curve Supply function A supply function shows the relationship between the quantity of a good producers are willing to sell and the determinants of supply: S = S (,I,...) Direct supply curve ( supply ): S = f() ( holding all other determinants constant!) Again, supply is often written as an inverse supply function S = g() = g 1 ( S ) Shifts in vs. Movements along Curves Demand Curve: Shifts in Curves versus Movemens along Curves D = (,M,S,C,I,...) Change in price: Movement along the curve (price is drawn on the vertical axis!) Change in uantity Demanded Change of any other determinant of demand: Shifts the demand curve Change in Demand

5 Movements along curves... Shifts in curves... = a0 a1 +a2m M < 0 M > 0 < 0 = a0 a1 +a2 M Shifts in a curve... How much a curve is shifted when income increases from M1 to M2? 1 = a0 a1 +a2m1 2 = a0 a1 +a2m2 / 1 2 = a0 a0 +a1 a1 +a2m1 a2m2 1 2 = a2(m1 M2) [ = a2 M ] M = a2 Shifts in a curve: Example Example: D = M M M = 5 M = 5 40 = for M = 40 D = = for M = 80 D = =

6 Endogenous and Exogenous Variables Endogenous Variables: are determined within the system. Exogenous Variables: are determined outside the system. In our simple model, price and quantity are endogenous variables, all other Variables (income, price of substitutes, technology,...) are exogenous variables. Endogenous and Exogenous Variables Endogenous variables are those drawn on the axis! Exogeneous variables affect endogeneous variables, but not the other way round! Endogenous:,, Exogenous: M M Shifts in vs. Movements along Curves: Recap Shifts in vs. Movements along Curves Whenever a variable changes that is drawn on an axis (price) we move along the demand curve! Endogenous variables Whenever a variable changes that is not drawn on an axis the demand curve shifts! Exogenous variables Similar holds for the supply curve: Change in quantity supplied vs. change in supply Change in uantity Supplied Occurs when price changes Movement along supply curve Change in Supply Occurs when one of the other variables, or determinants of supply, changes Supply curve shifts rightward or leftward

7 Equilibrium Equilibrium Analysis In short, economists have powerful tools: formal modelling, the assumption of maximizing behaviour by agents, and the notion of equilibrium. Using these techniques produces crisp, testable conclusions. (Fiona Scott Morton) A situation in which, at a given price, consumers can buy all of a good they wish and producers can sell all of the good they wish, or the intersection of demand and supply curves Equilibrium rice S D Endogenenous variables, D and S adjust until the equilibrium values of and are reached. Market clearing price: As long as the price is allowed to adjust freely to the equilibrium, there will never be a permanent shortage or surplus at the market! Why Equilibrium Analysis? Economists hope, that an equilibrium is similar to an center of gravity, even if in the short run it s frequently disturbed by other forces Economic life is continually lurching from one out-of-equilibrium position to another. (Joan Robinson) You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time. (Abraham Lincoln)

8 Example Consider the following market D = S = Equilibrium requires D = S : Solving this equation yields = = 30 = 60 Example At the market-clearing price = 60 we have If = 80 Therefore D = 1, = 800 = S = = 800 = D = 1, = 600 S = = 1,200 S D = 1, = 600 Excess supply (surplus) Controls on rices Controls on rices In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. Controls on prices are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created price ceilings and price floors.

9 rice Floors Example: Minimum Wage rice Floor: Wage Unemployment min Excess Supply uantity sold binding not binding Examples: Agriculture Minimum wages... A price floor that is not binding (i.e. below the equilibrium price) has no effect at all! Minimum Wage Equilibrium Wage Those helped Those by the who minimum loose wage their jobs Those who now want a job but cannot find one uantity of Labor rice Ceilings Example: Rent Controls rice Ceiling: max Excess Demand uantity sold binding not binding Examples: Rents Energy... Rent controls are ceilings placed on the rents that landlords may charge their tenants The goal of rent control policy is to help the poor by making housing more affordable Black markets usually arise in such situations One economist called rent control the best way to destroy a city, other than bombing A price ceiling that is not binding (i.e. above the equilibrium price) has no effect at all!

10 Rent Controls C Short Run: Supply relatively inelastic shortage C Long Run: shortage Supply relatively elastic Shocking the Equilibrium: Comparative-static Analysis Apartments lost due to rent control Apartments lost due to rent control Comparative-static Analysis Comparative-static Analysis What is the impact of a change in income on equilibrium quantities and prices? Comparative-static analysis is a very general method for analyzing such changes it is comparative, because it involves comparing two situations, (before and after), it is static, because the adjustment over time is not analyzed (as opposed to a dynamic analysis) A Comparative-static Analysis shows how the endogenous variables of a model adjust when an exogeneous variable changes We compare two equilibrium points, before and after the change of the exogenous variable We could as well calculate the equilibria before and after the exogeneous change and compare these two equilibria, but there are simpler ways...

11 Comparative-static Analysis Solution involves three steps 1 Set up the model regarding the demand and supply functions Structural form 2 Solve the model in structural form for the endogenous variables Reduced form 3 Differentiate the reduced form with respect to the exogenous variables and interpret the result Example 1. Step: Model in structural form S = D = M S = D 2. Step: Model in reduced form = M 0.2 = M = M = M Example Comparative-static Analysis = M = M 3. Step: Form the (partial) derivatives of the reduced form with respect to the exogenous variables M = 2.5 M = 0.25 Interpretation: If income M increases by one unit (e.g., Euro) equilibrium price increases by 2.5 units (e.g., Euro) and equilibrium quantity by 0.25 units (e.g., kg). Be careful Derivatives of a structural form eq. with respect to an exogeneous or endogeneous variable: slope of the structural equation with respect to this variable Derivatives of a equation of the reduced form eq. with respect to an exogeneous variable: comparative-static analysis: shows how an endogenous variable adjusts for a new equilibrium after an exogenous variable has changed

12 Another example 1. Step: Linear model in structural form S = a0 +a1 D = b0 b1 +b2m S = D 2. Step: Solution reduced form a0 +a1 = b0 b1 +b2m (a1 +b1) = b0 a0 +b2m b0 a0 +b2m = a1 +b1 Another example Solution for : we substitute in the first or second equation ( ) = a0 a1 b0 a0 +b2m = a0 a1 a1 +b1 a0b1 +a1b0 +a1b2m = a1 +b1 Another example Solution (reduced form): b0 a0 +b2m = a1 +b1 a0b1 +a1b0 +a1b2m = a1 +b1 3. Differentiation and interpretation d dm = b2? 0; a1 +b1 Interpretation? d dm = a1b2 a1 +b1? 0 Comparative-static Analysis Movement from one equilibrium to another equilibrium, caused by a change of an exogenous variable S = a0 +a1 D = b0 b1 +b2m S = D Result: (for b2 > 0) M = b2a1 > 0 b1 +a1 M = b2 > 0 b1 +a1

13 Comparative-static Analysis Comparative-static Analysis Graphical Solution Graphical Solution: 3 Steps: Decide whether the event shifts the supply or demand curve (or both) Decide whether the curve(s) shift(s) to the left or to the right Examine how the shift affects equilibrium price and quantity Comparative-static Analysis Dynamic of Adjustemnt Example: If income increases consumer will be willing to spend more at any initial price (if it s a normal good), i.e., the demand curve shifts to the right Suppliers have at the initial price no incentive to supply more, they expand production only when price rises! Therefore, a shift of the demand curve to the right causes an excess demand (shortage), this causes prices to rise, and suppliers adjust along the supply curve! Excess Demand An exogeneous rise in income causes an excess demand,... therefore price will increase and suppliers adjust along the supply curve.

14 Changes in Market Equilibrium ualitative forecast: redicts only the direction in which an economic variable will move uantitative forecast: redicts both the direction and the magnitude of the change in an economic variable Econometrics uses statistical tools (regression analysis) for making quantitative forecast Examples What is the effect of the following events on equilibrium quantity and price? A strike in a firm on the goods market [ ] What is the effect of a decrease of average family size on the market for 4-room apartments [ ] An increase in wages in a firm on the market of the good they produce [ ] Valentine s day on the market for flowers [ ] A decrease in the price for epsi on the market for Coca-Cola [ ] A tax on electricity on the market for aluminium [ ] Skip Solutions Example Strike Goods market: decrease in supply. Example Decreasing number of kids market for large apartments: decrease in demand. back back

15 Example Increasing wages Goods market: decrease in supply. Example Valentin s day Market for flowers: increase in demand. back fwd., back Example Valentin s day Market for flowers: but: Expectations of suppliers can also shift the supply curve to the right! rice can increase or decrease, but quantity willalways increase! back Example epsi becomes cheaper Market Coca-Cola: decrease in demand. back

16 Example Tax on electricity Market for aluminium: decrease in supply. Example: rice of Coffee Why are coffee prices very volatile? Most of the world s coffee is produced in Brazil Many changing weather conditions affect the crop of coffee, thereby affecting price rice following bad weather conditions is usually short-lived In long run, prices come back to original levels, all else equal back rice of Coffee ( , nominal prices) rice of Coffee: short-run 2 1 DS2 2 S1 1 In the short run supply is (almost) perfectly inelastic (vertical) A freeze decreases the supply of coffee rice increases significantly due to inelastic supply and demand.

17 rice of Coffee: long-run Shifts in Supply and Demand lr lr Slr D In the long run supply is extremely elastic (almost horizontal), demand is more elastic than in the short run rice falls back to lr uantity falls back to lr. When supply and demand change simultaneously, the impact on the equilibrium price and quantity is determined by: The relative size and direction of the change. The shape of the supply and demand models. Example: The rice of a Education Example: The rice of a Education The real price of a college education in USA rose 55 percent from 1970 to Increases in costs of modern classrooms and wages increased costs of production decrease in supply. Due to a larger percentage of high school graduates attending college, demand increased S2002 S1970 D2002 D

18 Resource Market Equilibrium Resource Market Equilibrium Consumption of copper has increased about a hundredfold from 1880 through The long term real price for copper has somewhat fallen. Increased demand as world economy grew. Decreased production costs increased supply. S1900 D1900 S1950 D1950 S2005 D2005 Long-Run ath of rice and Consumption rices of Copper ( , real & nominal prices) Allocation function of the market Summary: Exogeneous changes in demand or supply cause prices to change in response to new scarcities. This new prices affect demand and supply decisions (prices act as incentives ), behaviour of market participants changes in response to price signals. Therefore, competitive markets contribute to an efficient allocation of resources! (Details will follow...)

19 Equilibrium & Welfare Economics Value of Market Exchange: Consumer- and roducer Surplus Market equilibrium reflects the way markets allocate scarce resources Whether the market allocation is desirable or not is determined by welfare positions of buyers and sellers Welfare Economics Buyers and sellers receive benefits from taking part in the market: Consumer surplus and producer surplus Sum over consumer and producer surplus represents a society s total welfare Equilibrium in a market maximizes the total welfare of buyers and sellers Willingness to pay Consumer Surplus Consumer will buy a good only if its benefit at least covers its cost (price) Willingness to pay: Maximum price that a buyer is willing and able to pay for a good Reservation rice: rice at which a consumer is just indifferent between buying and not buying Measures the willingness to pay. If you buy for the reservation price you are neither better nor worse off, your cost equals your benefit!

20 Example Willingness to ay and Market Demand: Willingness to pay 20 of A, B, C & D: 15 $ A B 15 7 C 10 5 D Market Demand Demand and willingness to pay Willingness to pay of A Willingness to pay of B Wt of C Wt of D Consumer Surplus Consumer Surplus with = 15: Total consumer surplus 20 = consumer surplus of A A = 1 5 = Consumer Surplus Consumer Surplus with = 10: Total consumer Surplus = consumer surplus of A 20 + consumer surplus of B = = A B

21 Consumer Surplus Consumer Surplus with = 7: Total consumer Surplus = consumer surplus of A 20 + consumer surplus of B + consumer surplus of C 15 A = = B C Consumer Surplus Total consumer surplus and expenditures with = 8: 20 Total Consumer Surplus = = Total Expenditures Total = 3 8 = Consumer Surplus 8 5 Total Expenditures Effects of a price cut Effects of a price cut Initial consumer surplus Consumer surplus to new consumers Additional consumer surplus to initial consumers (With many consumers the market demand curve is almost linear.) D Total additional consumer surplus of a price cut D

22 Consumer Surplus Consumer Surplus Consumer surplus in the market is measured by the area below the demand curve and above the equilibrium price Consumer surplus is the amount that buyers are willing to pay for a good minus the amount they actually pay for it. Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves perceive it Attention: This concept of consumer surplus neglects tat a change in prices ceteris paribus also affects the purchasing power! Therefore it is only approximately valid This concept of consumer surplus is only a limited indicator for welfare, since it does not consider other aspects of welfare, like fairness or the distribution of income roducer Surplus roducer Surplus roducer will sell a product only when the price of the unit sold at least covers the cost of this unit Marginal Cost: The cost of one additional unit (or the cost of the last produced unit respectively)

23 Example Example Marginal Cost and Market Supply: Marginal cost(mc) of 4 producers W, X, Y & Z: MC ($) W 5 X 12 Y 17 Z 22 Supply of W, X, Y & Z at different prices: rice Seller(s) S 22 W, X, Y & Z 4 17 < 22 W, X & Y 3 12 < 17 W & X 2 5 < 12 W 1 < 5 0 Marginal Cost and Market Supply: Supply Curve Marginal Cost of MC of Z 20 W, X, Y & Z: MC of Y 15 $ W 5 MC of X 10 X 12 Y 17 5 MC of W Z roducer Surplus At any quantity, the price given by the supply curve shows the cost of the marginal seller, the seller who would leave the market first if the price were any lower Just as consumer surplus is related to the demand curve, producer surplus is closely related to the supply curve roducer Surplus: The area below the price and above the supply curve measures the producer surplus in a market roducer Surplus roducer Surplus with = 12: W Total roducer Surplus = roducer Surplus of W = 1 (12 5) =

24 roducer Surplus roducer Surplus with = 17: W X Total roducer Surplus = roducer Surplus of W + roducer Surplus of X = 1 (17 5) +1 (17 12) = roducer Surplus roducer Surplus with = 22: W X Total roducer Surplus = roducer Surplus of W + roducer Surplus of X + roducer Surplus of Y = = Y Effects of a price increase Effects of a price increase additional producer surplus to initial producers S Total additional producer surplus S producer surplus to new producers Initial producer surplus

25 Demand and Supply Function Equilibrium & Welfare Wt A: 20 MC W: 5 Wt B: 15 MC X: 12 MC Z: 22 MC Y: 17 Wt C: 10 Wt D: MC: Marginal Cost Wt: Willingness to ay Equilibrium & Welfare Equilibrium & Welfare Free markets allocate the supply of goods to the buyers who value them most highly Free markets allocate the demand for goods to the sellers who can produce them at least cost Free markets produce the quantity of goods that maximizes the sum of consumer and producer surplus Value to buyers Value to buyers is greater than cost to sellers! Cost to producers S Cost to producers Value to buyers D Value to buyers is less than cost to sellers!

26 Equilibrium & Welfare Equilibrium & Welfare = Value to Amount paid consumers by consumers = Revenue of Cost to producers Sellers Consumersurplus roducersurplus Consumer surplus roducer surplus Market efficiency is achieved when the allocation of resources maximizes total surplus! S Total Value to Cost to = Surplus Consumers Sellers D Market Efficiency Market outcome is often not efficient Market failure: Examples include Market power Externalities ublic goods Asymmetric information rice regulation... Apart from efficiency, a social planner might also care about equity: Fairness of the distribution of well-being among the various buyers and sellers Welfare Effects of rice Regulations

27 Welfare effects of price floors Welfare effects of price ceilings Effects of a price floor: min = Consumer surplus roducer surplus min = Effects of a price ceiling: max = roducer Surplus Deadweight loss Consumersurplus Deadweight loss max = rice Regulation and Deadweight Loss Notice: The total amount of the deadweight loss depends on... how distant the price floor/ceiling is away from the equilibrium price, and the slopes of demand and supply curves An Application: International Trade

28 International Trade International Trade If a country is isolated from rest of the world (under autarky) domestic price adjusts to balance demand and supply. The sum of consumer and producer surplus measures the total benefits that buyers and sellers receive. Can international trade further improve this situation? If a country has a comparative advantage, then the domestic price will be below the world price, and the country will be an exporter of the good. If the country has a comparative disadvantage, then the domestic price will be higher than the world price, and the country will be an importer of the good. Two Countries before International Trade International Trade Consumer and producer surplus under autarky: Country 1 Country 2 Consumer and producer surplus with trade: Country 1 (Importer) Country 2 (Exporter) W Country 2 has a comparative advantage in the production of this good, i.e., it can produce the good cheaper! S Imports D D Exports S

29 International Trade International Trade and Welfare Consumer and producer surplus with trade: Country 1 (Importer) W S Imports Netgain of consumer surplus Country 2 (Exporter) D D Netgain of producer surplus Exports S Consequences for importing countries: Domestic producers of the good are worse off, and domestic consumers of the good are better off. If welfare of producers and consumers is equally weighted trade raises the economic well-being of the nation as a whole. Consequences for exporting countries: Domestic producers of the good are better off, and domestic consumers of the good are worse off. Again, trade raises the economic well-being of the nation as a whole. Tariffs Trade olicy Tariffs are taxes on imported goods. Tariffs raise the price of imported goods above the world price by the amount of the tariff. A tariff reduces the quantity of imports and moves the domestic market closer to its equilibrium without trade. With a tariff, total surplus in the market decreases by an amount referred to as a deadweight loss.

30 The Effects of a Tariff Tariff per unit of imports: Z W Total loss of consumer surplus The Effects of a Tariff Tariff per unit of imports: Z W Redistribution from consumers to producers A B D C Deadweight Loss Tax revenue (redistribution from consumers to the government) s W s Z d Z d W W s Z s d Z d W Total loss of consumer surplus: A + B + C + D rotectionism The World Trade Organisation (WTO) roducers of the protected good are usually the winners of protectionism. The gains fall often on a small number of companies, they can organize their interests better than consumers ( Lobbying). Consumers are the loosers of rotectionism (prices increase), but find it difficult to organize their interests, because they have high transaction costs, the gains spread out over millions of consumers. After Second World War the General Agreement on Tariffs and Trade (GATT) has successfully reduced the average tariff among member countries from about 40% to about 5%. The GATT refers to a continuing series of negotiations among many of the world s countries with a goal of promoting free trade. The World Trade Organisation (WTO) is the successor of GATT ( Uruguay Round) and more powerful than GATT!

31 The World Trade Organisation (WTO) WTO Rules: Non-discrimination: Under the most favored nations clause, any trade concession that one country makes one member must be granted to all signatories. Reciprocity: Any nation benefiting from a tariff reduction by another country must reciprocate by making similar tariff reductions itself. Furthermore: General prohibition of quotas, Fair competition, Binding tariffs. Any questions? Thanks!

SUPPLY AND DEMAND : HOW MARKETS WORK

SUPPLY AND DEMAND : HOW MARKETS WORK SUPPLY AND DEMAND : HOW MARKETS WORK Chapter 4 : The Market Forces of and and demand are the two words that economists use most often. and demand are the forces that make market economies work. Modern

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 6 - Markets in Action - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The short-run impact of the San Francisco earthquake

More information

Demand, Supply and Elasticity

Demand, Supply and Elasticity Demand, Supply and Elasticity CHAPTER 2 OUTLINE 2.1 Demand and Supply Definitions, Determinants and Disturbances 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and

More information

4 THE MARKET FORCES OF SUPPLY AND DEMAND

4 THE MARKET FORCES OF SUPPLY AND DEMAND 4 THE MARKET FORCES OF SUPPLY AND DEMAND IN THIS CHAPTER YOU WILL Learn what a competitive market is Examine what determines the demand for a good in a competitive market Chapter Overview Examine what

More information

Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity.

Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity. Microeconomics Topic 3: Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity. Reference: Gregory Mankiw s rinciples of Microeconomics,

More information

Demand, Supply, and Market Equilibrium

Demand, Supply, and Market Equilibrium 3 Demand, Supply, and Market Equilibrium The price of vanilla is bouncing. A kilogram (2.2 pounds) of vanilla beans sold for $50 in 2000, but by 2003 the price had risen to $500 per kilogram. The price

More information

14 : Elasticity of Supply

14 : Elasticity of Supply 14 : Elasticity of Supply 1 Recap from Session Budget line and Consumer equilibrium Law of Equi Marginal utility Price, income and substitution effect Consumer Surplus Session Outline Elasticity of Supply

More information

Chapter 6 Supply, Demand, and Government Policies

Chapter 6 Supply, Demand, and Government Policies Chapter 6 Supply, Demand, and Government Policies Review Questions Using supply-demand diagrams, show the difference between a non-binding price ceiling and a binding price ceiling in the wheat market.

More information

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y

10/7/2013. Chapter 9: Introduction to Economic Fluctuations. Facts about the business cycle. Unemployment. Okun s Law Y Y Facts about the business cycle Chapter 9: GD growth averages 3 3.5 percent per year over the long run with large fluctuations in the short run. Consumption and investment fluctuate with GD, but consumption

More information

Chapter 3 Market Demand, Supply and Elasticity

Chapter 3 Market Demand, Supply and Elasticity Chapter 3 Market Demand, Supply and Elasticity Multiple Choice Questions Choose the one alternative that best completes the statement or answers the question. 1. Ceteris paribus means (a) other things

More information

17. Suppose demand is given by Q d = 400 15P + I, where Q d is quantity demanded, P is. I = 100, equilibrium quantity is A) 15 B) 20 C) 25 D) 30

17. Suppose demand is given by Q d = 400 15P + I, where Q d is quantity demanded, P is. I = 100, equilibrium quantity is A) 15 B) 20 C) 25 D) 30 Ch. 2 1. A relationship that shows the quantity of goods that consumers are willing to buy at different prices is the A) elasticity B) market demand curve C) market supply curve D) market equilibrium 2.

More information

Selected Homework Answers from Chapter 3

Selected Homework Answers from Chapter 3 elected Homework Answers from Chapter 3 NOTE: To save on space, I have not given specific labels to my axis, but rather stuck with just and. Ideally, you should put specific labels. For example, the vertical

More information

LECTURE NOTES ON MACROECONOMIC PRINCIPLES

LECTURE NOTES ON MACROECONOMIC PRINCIPLES LECTURE NOTES ON MACROECONOMIC PRINCIPLES Peter Ireland Department of Economics Boston College peter.ireland@bc.edu http://www2.bc.edu/peter-ireland/ec132.html Copyright (c) 2013 by Peter Ireland. Redistribution

More information

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline

Chapter 3. The Concept of Elasticity and Consumer and Producer Surplus. Chapter Objectives. Chapter Outline Chapter 3 The Concept of Elasticity and Consumer and roducer Surplus Chapter Objectives After reading this chapter you should be able to Understand that elasticity, the responsiveness of quantity to changes

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Perfect Competition - Sample Questions MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Perfect competition is an industry with A) a

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MBA 640 Survey of Microeconomics Fall 2006, Quiz 6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly is best defined as a firm that

More information

PAGE 1. Econ 2113 - Test 2 Fall 2003 Dr. Rupp. Multiple Choice. 1. The price elasticity of demand measures

PAGE 1. Econ 2113 - Test 2 Fall 2003 Dr. Rupp. Multiple Choice. 1. The price elasticity of demand measures PAGE 1 Econ 2113 - Test 2 Fall 2003 Dr. Rupp Multiple Choice 1. The price elasticity of demand measures a. how responsive buyers are to a change in income. b. how responsive sellers are to a change in

More information

Elasticity. I. What is Elasticity?

Elasticity. I. What is Elasticity? Elasticity I. What is Elasticity? The purpose of this section is to develop some general rules about elasticity, which may them be applied to the four different specific types of elasticity discussed in

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. Principles of Microeconomics Fall 2007, Quiz #6 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question on the accompanying scantron. 1) A monopoly is

More information

1. Supply and demand are the most important concepts in economics.

1. Supply and demand are the most important concepts in economics. Page 1 1. Supply and demand are the most important concepts in economics. 2. Markets and Competition a. Market is a group of buyers and sellers of a particular good or service. P. 66. b. These individuals

More information

Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change

Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change 1 Supplement Unit 1. Demand, Supply, and Adjustments to Dynamic Change Introduction This supplemental highlights how markets work and their impact on the allocation of resources. This feature will investigate

More information

Practice Questions Week 3 Day 1

Practice Questions Week 3 Day 1 Practice Questions Week 3 Day 1 Figure 4-1 Quantity Demanded $ 2 18 3 $ 4 14 4 $ 6 10 5 $ 8 6 6 $10 2 8 Price Per Pair Quantity Supplied 1. Figure 4-1 shows the supply and demand for socks. If a price

More information

Principle of Microeconomics Econ 202-506 chapter 6

Principle of Microeconomics Econ 202-506 chapter 6 Principle of Microeconomics Econ 202-506 chapter 6 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The buyers pay the entire sales tax levied on

More information

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved

Chapter 9. The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis. 2008 Pearson Addison-Wesley. All rights reserved Chapter 9 The IS-LM/AD-AS Model: A General Framework for Macroeconomic Analysis Chapter Outline The FE Line: Equilibrium in the Labor Market The IS Curve: Equilibrium in the Goods Market The LM Curve:

More information

Pre Test Chapter 3. 8.. DVD players and DVDs are: A. complementary goods. B. substitute goods. C. independent goods. D. inferior goods.

Pre Test Chapter 3. 8.. DVD players and DVDs are: A. complementary goods. B. substitute goods. C. independent goods. D. inferior goods. 1. Graphically, the market demand curve is: A. steeper than any individual demand curve that is part of it. B. greater than the sum of the individual demand curves. C. the horizontal sum of individual

More information

Midterm Exam #1 - Answers

Midterm Exam #1 - Answers Page 1 of 9 Midterm Exam #1 Answers Instructions: Answer all questions directly on these sheets. Points for each part of each question are indicated, and there are 1 points total. Budget your time. 1.

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) It is efficient to produce an additional shirt if A) the marginal benefit of producing the shirt

More information

Theoretical Tools of Public Economics. Part-2

Theoretical Tools of Public Economics. Part-2 Theoretical Tools of Public Economics Part-2 Previous Lecture Definitions and Properties Utility functions Marginal utility: positive (negative) if x is a good ( bad ) Diminishing marginal utility Indifferences

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Chapter 11 Monopoly practice Davidson spring2007 MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A monopoly industry is characterized by 1) A)

More information

Non Sequitur by Wiley Miller

Non Sequitur by Wiley Miller SUPPLY & DEMAND Non Sequitur by Wiley Miller Graph Basics Movement change along the curve Shift the curve moves Increase to the right Decrease to the left Intersection of curves Price Label: both axis,

More information

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS

ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS ECON 103, 2008-2 ANSWERS TO HOME WORK ASSIGNMENTS Due the Week of June 23 Chapter 8 WRITE [4] Use the demand schedule that follows to calculate total revenue and marginal revenue at each quantity. Plot

More information

DEMAND AND SUPPLY CURVES: CONSUMER & PRODUCER SURPLUS by Kenneth Matziorinis

DEMAND AND SUPPLY CURVES: CONSUMER & PRODUCER SURPLUS by Kenneth Matziorinis 1 EMAN AN UPPLY CURVE: CONUMER & PROUCER URPLU by Kenneth Matziorinis Price (P / Q) P emand () Pd Po 0 Qo Qd Q Quantity (Q / time) FIGURE 1.1 THE EMAN CURVE The emand Curve and the Law of emand The demand

More information

6. In general, over longer periods, demand tends to become (A) More elastic (B) Perfectly elastic (C) Perfectly inelastic (D) Less elastic

6. In general, over longer periods, demand tends to become (A) More elastic (B) Perfectly elastic (C) Perfectly inelastic (D) Less elastic 5. The demand for a good is said to be inelastic if (A) More units will be purchased if price increases (B) The percentage change in quantity demanded is greater than the percentage in price (C) The demand

More information

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY

CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY CHAPTER 10 MARKET POWER: MONOPOLY AND MONOPSONY EXERCISES 3. A monopolist firm faces a demand with constant elasticity of -.0. It has a constant marginal cost of $0 per unit and sets a price to maximize

More information

Employment and Pricing of Inputs

Employment and Pricing of Inputs Employment and Pricing of Inputs Previously we studied the factors that determine the output and price of goods. In chapters 16 and 17, we will focus on the factors that determine the employment level

More information

1. According to Figure 1.1, what is the opportunity cost of increasing consumer output from OF to OD?

1. According to Figure 1.1, what is the opportunity cost of increasing consumer output from OF to OD? Solutions to Problem set 1 (chp 1 Q1-7 / chp 3 Q3-7) 28 possible points Chapter 1 1. According to Figure 1.1, what is the opportunity cost of increasing consumer output from OF to OD? In figure 1.1, the

More information

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology

Production Function in the Long-Run. Business Economics Theory of the Firm II Production and Cost in the Long Run. Description of Technology Business Economics Theory of the Firm II Production and Cost in the ong Run Two or more variable input factors Thomas & Maurice, Chapter 9 Herbert Stocker herbert.stocker@uibk.ac.at Institute of International

More information

Midterm Exam - Answers. November 3, 2005

Midterm Exam - Answers. November 3, 2005 Page 1 of 10 November 3, 2005 Answer in blue book. Use the point values as a guide to how extensively you should answer each question, and budget your time accordingly. 1. (8 points) A friend, upon learning

More information

COMPETITIVE MARKETS: 10APPLICATIONS

COMPETITIVE MARKETS: 10APPLICATIONS COMPETITIVE MARKETS: 10APPLICATIONS 10.1 THE INVISIBLE HAND, EXCISE TAXES, AND SUBSIDIES APPLICATION 10.1 Taxes Gallons and Dollars: Gasoline 10.2 PRICE CEILINGS AND FLOORS 10.3 PRODUCTION QUOTAS APPLICATION

More information

DEMAND AND SUPPLY. Chapter. Markets and Prices. Demand. C) the price of a hot dog minus the price of a hamburger.

DEMAND AND SUPPLY. Chapter. Markets and Prices. Demand. C) the price of a hot dog minus the price of a hamburger. Chapter 3 DEMAND AND SUPPLY Markets and Prices Topic: Price and Opportunity Cost 1) A relative price is A) the slope of the demand curve B) the difference between one price and another C) the slope of

More information

Econ 202 Exam 2 Practice Problems

Econ 202 Exam 2 Practice Problems Econ 202 Exam 2 Practice Problems Principles of Microeconomics Dr. Phillip Miller Multiple Choice Identify the choice that best completes the statement or answers the question. Chapter 6 1. If a binding

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) The law of demand states that, other things remaining the same, the lower the price of a good,

More information

The Demand Curve. Supply and Demand. Shifts in Demand. The Law of Demand. Lecture 3 outline (note, this is Chapter 4 in the text).

The Demand Curve. Supply and Demand. Shifts in Demand. The Law of Demand. Lecture 3 outline (note, this is Chapter 4 in the text). upply and emand Lecture 3 outline (note, this is Chapter 4 in the text). The demand d curve The supply curve Factors causing shifts of the demand curve and shifts of the supply curve. Market equilibrium

More information

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!!

Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! Practice Multiple Choice Questions Answers are bolded. Explanations to come soon!! For more, please visit: http://courses.missouristate.edu/reedolsen/courses/eco165/qeq.htm Market Equilibrium and Applications

More information

Long Run Supply and the Analysis of Competitive Markets. 1 Long Run Competitive Equilibrium

Long Run Supply and the Analysis of Competitive Markets. 1 Long Run Competitive Equilibrium Long Run Competitive Equilibrium. rinciples of Microeconomics, Fall 7 Chia-Hui Chen October 9, 7 Lecture 6 Long Run Supply and the Analysis of Competitive Markets Outline. Chap 8: Long Run Equilibrium.

More information

The Central Idea CHAPTER 1 CHAPTER OVERVIEW CHAPTER REVIEW

The Central Idea CHAPTER 1 CHAPTER OVERVIEW CHAPTER REVIEW CHAPTER 1 The Central Idea CHAPTER OVERVIEW Economic interactions involve scarcity and choice. Time and income are limited, and people choose among alternatives every day. In this chapter, we study the

More information

Chapter 4: Elasticity

Chapter 4: Elasticity Chapter : Elasticity Elasticity of eman: It measures the responsiveness of quantity emane (or eman) with respect to changes in its own price (or income or the price of some other commoity). Why is Elasticity

More information

11 PERFECT COMPETITION. Chapter. Competition

11 PERFECT COMPETITION. Chapter. Competition Chapter 11 PERFECT COMPETITION Competition Topic: Perfect Competition 1) Perfect competition is an industry with A) a few firms producing identical goods B) a few firms producing goods that differ somewhat

More information

Supply and Demand. A market is a group of buyers and sellers of a particular good or service.

Supply and Demand. A market is a group of buyers and sellers of a particular good or service. Supply and Demand A market is a group of buyers and sellers of a particular good or service. The definition of the good is a matter of judgement: Should different locations entail different goods (and

More information

Oligopoly and Strategic Pricing

Oligopoly and Strategic Pricing R.E.Marks 1998 Oligopoly 1 R.E.Marks 1998 Oligopoly Oligopoly and Strategic Pricing In this section we consider how firms compete when there are few sellers an oligopolistic market (from the Greek). Small

More information

Chapter 3 Market Demand, Supply, and Elasticity

Chapter 3 Market Demand, Supply, and Elasticity Chapter 3 Market Demand, Supply, and Elasticity After reading chapter 3, MARKET DEMAND, SUPPLY, AND ELASTICITY, you should be able to: Discuss the Law of Demand and draw a Demand Curve. Distinguish between

More information

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 14 - Monopoly Fall 2010 Herriges (ISU) Ch. 14 Monopoly Fall 2010 1 / 35 Outline 1 Monopolies What Monopolies Do 2 Profit Maximization for the Monopolist 3

More information

chapter >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade

chapter >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade chapter 6 >> Consumer and Producer Surplus Section 3: Consumer Surplus, Producer Surplus, and the Gains from Trade One of the nine core principles of economics we introduced in Chapter 1 is that markets

More information

CHAPTER 2 THE BASICS OF SUPPLY AND DEMAND

CHAPTER 2 THE BASICS OF SUPPLY AND DEMAND CHAPTER 2 THE BASICS OF SUPPLY AN EMAN EXERCISES 1. Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows: Price ($) emand (millions)

More information

CH 10 - REVIEW QUESTIONS

CH 10 - REVIEW QUESTIONS CH 10 - REVIEW QUESTIONS 1. The short-run aggregate supply curve is horizontal at: A) a level of output determined by aggregate demand. B) the natural level of output. C) the level of output at which the

More information

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9

Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 Principles of Economics: Micro: Exam #2: Chapters 1-10 Page 1 of 9 print name on the line above as your signature INSTRUCTIONS: 1. This Exam #2 must be completed within the allocated time (i.e., between

More information

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY

CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY CHAPTER 7: AGGREGATE DEMAND AND AGGREGATE SUPPLY Learning goals of this chapter: What forces bring persistent and rapid expansion of real GDP? What causes inflation? Why do we have business cycles? How

More information

PPA 723, Fall 2006 Professor John McPeak

PPA 723, Fall 2006 Professor John McPeak Quiz One PPA 723, Fall 2006 Professor John McPeak Name: The total quiz is worth 20 points. Each question is worth 2 points, and each sub question is worth an equal share of the two points. 1) The demand

More information

Demand and Supply Examples

Demand and Supply Examples and Examples Review Price Floors and Ceilings keep market price from allocating scarce goods. Using demand and supply to predict changes in prices and quantities. Shifts in the demand schedule Shifts in

More information

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam.

Econ 201 Final Exam. Douglas, Fall 2007 Version A Special Codes 00000. PLEDGE: I have neither given nor received unauthorized help on this exam. , Fall 2007 Version A Special Codes 00000 PLEDGE: I have neither given nor received unauthorized help on this exam. SIGNED: PRINT NAME: Econ 201 Final Exam 1. For a profit-maximizing monopolist, a. MR

More information

Demand. See the Practical #4A Help Sheet for instructions and examples on graphing a demand schedule.

Demand. See the Practical #4A Help Sheet for instructions and examples on graphing a demand schedule. Demand Definition of Demand: Demand is a relation that shows the quantities that buyers are willing and able to purchase at alternative prices during a given time period, all other things remaining the

More information

Chapter 6 Competitive Markets

Chapter 6 Competitive Markets Chapter 6 Competitive Markets After reading Chapter 6, COMPETITIVE MARKETS, you should be able to: List and explain the characteristics of Perfect Competition and Monopolistic Competition Explain why a

More information

Midterm Exam #2. ECON 101, Section 2 summer 2004 Ying Gao. 1. Print your name and student ID number at the top of this cover sheet.

Midterm Exam #2. ECON 101, Section 2 summer 2004 Ying Gao. 1. Print your name and student ID number at the top of this cover sheet. NAME: STUDENT ID: Midterm Exam #2 ECON 101, Section 2 summer 2004 Ying Gao Instructions Please read carefully! 1. Print your name and student ID number at the top of this cover sheet. 2. Check that your

More information

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3

Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 Econ 303: Intermediate Macroeconomics I Dr. Sauer Sample Questions for Exam #3 1. When firms experience unplanned inventory accumulation, they typically: A) build new plants. B) lay off workers and reduce

More information

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position

Chapter 27: Taxation. 27.1: Introduction. 27.2: The Two Prices with a Tax. 27.2: The Pre-Tax Position Chapter 27: Taxation 27.1: Introduction We consider the effect of taxation on some good on the market for that good. We ask the questions: who pays the tax? what effect does it have on the equilibrium

More information

MICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours

MICROECONOMIC PRINCIPLES SPRING 2001 MIDTERM ONE -- Answers. February 16, 2001. Table One Labor Hours Needed to Make 1 Pounds Produced in 20 Hours MICROECONOMIC PRINCIPLES SPRING 1 MIDTERM ONE -- Answers February 1, 1 Multiple Choice. ( points each) Circle the correct response and write one or two sentences to explain your choice. Use graphs as appropriate.

More information

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies

Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Gov t Intervention: Price Floors & Price Ceilings / Taxes & Subsidies Price Floor: Regulated price, cannot charge below this price. A price floor will be binding if it is set above the true equilibrium

More information

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets

Managerial Economics & Business Strategy Chapter 8. Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets Managerial Economics & Business Strategy Chapter 8 Managing in Competitive, Monopolistic, and Monopolistically Competitive Markets I. Perfect Competition Overview Characteristics and profit outlook. Effect

More information

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION

CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION CHAPTER 11 PRICE AND OUTPUT IN MONOPOLY, MONOPOLISTIC COMPETITION, AND PERFECT COMPETITION Chapter in a Nutshell Now that we understand the characteristics of different market structures, we ask the question

More information

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd )

Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay. Lecture - 13 Consumer Behaviour (Contd ) (Refer Slide Time: 00:28) Managerial Economics Prof. Trupti Mishra S.J.M. School of Management Indian Institute of Technology, Bombay Lecture - 13 Consumer Behaviour (Contd ) We will continue our discussion

More information

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

ECON 3312 Macroeconomics Exam 3 Fall 2014. Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. ECON 3312 Macroeconomics Exam 3 Fall 2014 Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Everything else held constant, an increase in net

More information

Economic Efficiency, Government Price Setting, and Taxes

Economic Efficiency, Government Price Setting, and Taxes CHAPTER 4 Economic Efficiency, Government Price Setting, and Taxes Modified by: Changwoo Nam 1 Economic Efficiency, Government Price Setting, and Taxes A legally determined maximum price that sellers may

More information

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost.

A. a change in demand. B. a change in quantity demanded. C. a change in quantity supplied. D. unit elasticity. E. a change in average variable cost. 1. The supply of gasoline changes, causing the price of gasoline to change. The resulting movement from one point to another along the demand curve for gasoline is called A. a change in demand. B. a change

More information

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises

Chapter 14 Monopoly. 14.1 Monopoly and How It Arises Chapter 14 Monopoly 14.1 Monopoly and How It Arises 1) One of the requirements for a monopoly is that A) products are high priced. B) there are several close substitutes for the product. C) there is a

More information

Monopoly WHY MONOPOLIES ARISE

Monopoly WHY MONOPOLIES ARISE In this chapter, look for the answers to these questions: Why do monopolies arise? Why is MR < P for a monopolist? How do monopolies choose their P and Q? How do monopolies affect society s well-being?

More information

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE

Chapter. Perfect Competition CHAPTER IN PERSPECTIVE Perfect Competition Chapter 10 CHAPTER IN PERSPECTIVE In Chapter 10 we study perfect competition, the market that arises when the demand for a product is large relative to the output of a single producer.

More information

CHAPTER 3: DEMAND, SUPPLY, AND MARKET EQUILIBRIUM

CHAPTER 3: DEMAND, SUPPLY, AND MARKET EQUILIBRIUM CHAPTER 3: DEMAND, SUPPLY, AND MARKET EQUILIBRIUM Introduction Supply and demand are mechanisms by which our market economy functions. Changes in supply and demand affect prices and quantities produced,

More information

Monopoly and Monopsony

Monopoly and Monopsony Multi-lant Firm. rinciples of Microeconomics, Fall Chia-Hui Chen November, Lecture Monopoly and Monopsony Outline. Chap : Multi-lant Firm. Chap : Social Cost of Monopoly ower. Chap : rice Regulation. Chap

More information

I. Introduction to Aggregate Demand/Aggregate Supply Model

I. Introduction to Aggregate Demand/Aggregate Supply Model University of California-Davis Economics 1B-Intro to Macro Handout 8 TA: Jason Lee Email: jawlee@ucdavis.edu I. Introduction to Aggregate Demand/Aggregate Supply Model In this chapter we develop a model

More information

Chapter 7 Monopoly, Oligopoly and Strategy

Chapter 7 Monopoly, Oligopoly and Strategy Chapter 7 Monopoly, Oligopoly and Strategy After reading Chapter 7, MONOPOLY, OLIGOPOLY AND STRATEGY, you should be able to: Define the characteristics of Monopoly and Oligopoly, and explain why the are

More information

Market Supply in the Short Run

Market Supply in the Short Run Equilibrium in Perfectly Competitive Markets (Assume for simplicity that all firms have access to the same technology and input markets, so they all have the same cost curves.) Market Supply in the Short

More information

Chapter 03 The Concept of Elasticity and Consumer and

Chapter 03 The Concept of Elasticity and Consumer and Chapter 03 The Concept of Elasticity and Consumer and Multiple Choice Questions Use the following Figure 3.1 to answer questions 1-4: Figure 3.1 1. In Figure 3.1, if demand is considered perfectly elastic,

More information

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output.

D) Marginal revenue is the rate at which total revenue changes with respect to changes in output. Ch. 9 1. Which of the following is not an assumption of a perfectly competitive market? A) Fragmented industry B) Differentiated product C) Perfect information D) Equal access to resources 2. Which of

More information

Monopolistic Competition

Monopolistic Competition In this chapter, look for the answers to these questions: How is similar to perfect? How is it similar to monopoly? How do ally competitive firms choose price and? Do they earn economic profit? In what

More information

Advanced International Economics Prof. Yamin Ahmad ECON 758

Advanced International Economics Prof. Yamin Ahmad ECON 758 Advanced International Economics Prof. Yamin Ahmad ECON 758 Sample Midterm Exam Name Id # Instructions: There are two parts to this midterm. Part A consists of multiple choice questions. Please mark the

More information

Pre-Test Chapter 18 ed17

Pre-Test Chapter 18 ed17 Pre-Test Chapter 18 ed17 Multiple Choice Questions 1. (Consider This) Elastic demand is analogous to a and inelastic demand to a. A. normal wrench; socket wrench B. Ace bandage; firm rubber tie-down C.

More information

Market Structure: Perfect Competition and Monopoly

Market Structure: Perfect Competition and Monopoly WSG8 7/7/03 4:34 PM Page 113 8 Market Structure: Perfect Competition and Monopoly OVERVIEW One of the most important decisions made by a manager is how to price the firm s product. If the firm is a profit

More information

Problems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2

Problems: Table 1: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 Problems: Table 1: Labor Hours needed to make one Amount produced in 90 hours: Quilt Dress Quilts Dresses Helen 50 10 1.8 9 Carolyn 90 45 1 2 1. Refer to Table 1. For Carolyn, the opportunity cost of 1

More information

Recitation #4 Week 02/02/2009 to 02/08/2009 Chapter 5: The Market Strikes Back

Recitation #4 Week 02/02/2009 to 02/08/2009 Chapter 5: The Market Strikes Back Recitation #4 Week 02/02/2009 to 02/08/2009 Chapter 5: The Market Strikes Back Problems and Exercises 1. A price ceiling is implemented in the market for housing in Metropolitan City, where all housing

More information

Table of Contents MICRO ECONOMICS

Table of Contents MICRO ECONOMICS economicsentrance.weebly.com Basic Exercises Micro Economics AKG 09 Table of Contents MICRO ECONOMICS Budget Constraint... 4 Practice problems... 4 Answers... 4 Supply and Demand... 7 Practice Problems...

More information

CLASSIFICATION OF MARKETS Perfectly competitive, various types of imperfect competition

CLASSIFICATION OF MARKETS Perfectly competitive, various types of imperfect competition ECO 352 Spring 2010 No. 15 Mar. 30 TRADE POLICIES: TARIFFS AND QUOTAS CLASSIFICATION OF POLICIES Price-type: import tariffs, export taxes and subsidies Quantity-type: quotas, voluntary restraint and orderly

More information

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers.

An increase in the number of students attending college. shifts to the left. An increase in the wage rate of refinery workers. 1. Which of the following would shift the demand curve for new textbooks to the right? a. A fall in the price of paper used in publishing texts. b. A fall in the price of equivalent used text books. c.

More information

Final Exam 15 December 2006

Final Exam 15 December 2006 Eco 301 Name Final Exam 15 December 2006 120 points. Please write all answers in ink. You may use pencil and a straight edge to draw graphs. Allocate your time efficiently. Part 1 (10 points each) 1. As

More information

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Suvey of Macroeconomics, MBA 641 Fall 2006, Final Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Modern macroeconomics emerged from

More information

Chapter 4 Supply and Demand Macroeconomics In Context (Goodwin, et al.)

Chapter 4 Supply and Demand Macroeconomics In Context (Goodwin, et al.) Chapter 4 Supply and Demand Macroeconomics In Context (Goodwin, et al.) Chapter Overview In this chapter, you ll find the basics of supply and demand analysis. As you work through this chapter, you will

More information

POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY

POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY POTENTIAL OUTPUT and LONG RUN AGGREGATE SUPPLY Aggregate Supply represents the ability of an economy to produce goods and services. In the Long-run this ability to produce is based on the level of production

More information

In this chapter, you will learn to use cost-volume-profit analysis.

In this chapter, you will learn to use cost-volume-profit analysis. 2.0 Chapter Introduction In this chapter, you will learn to use cost-volume-profit analysis. Assumptions. When you acquire supplies or services, you normally expect to pay a smaller price per unit as the

More information

BPE_MIC1 Microeconomics 1 Fall Semester 2011

BPE_MIC1 Microeconomics 1 Fall Semester 2011 Masaryk University - Brno Department of Economics Faculty of Economics and Administration BPE_MIC1 Microeconomics 1 Fall Semester 2011 Final Exam - 05.12.2011, 9:00-10:30 a.m. Test A Guidelines and Rules:

More information

Chapter 12. Aggregate Expenditure and Output in the Short Run

Chapter 12. Aggregate Expenditure and Output in the Short Run Chapter 12. Aggregate Expenditure and Output in the Short Run Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 203 502 Principles of Macroeconomics Aggregate Expenditure (AE)

More information