Supply and Demand. Some Course Setup Issues

Size: px
Start display at page:

Download "Supply and Demand. Some Course Setup Issues"

Transcription

1 1 Supply and Demand 1. Some Course Setup Issues 2. What is a Market? 3. The Demand Curve Movement along the demand curve versus shifts in the demand curve 4. The Supply Curve Movement along the supply curve versus shifts in the supply curve 5. Equilibrium of Supply and Demand 6. Let s Work through Some Examples 7. The Role Prices Play in Answering the Three Fundamental Questions 8. Elasticities 9. Elasticities in the Long and Short Run 2 Some Course Setup Issues Rules on Problem Sets On time at the beginning of class, or else... Must be your own work. Sections Integral part of the course Be prepared to discuss and raise questions on lectures and readings. Some Wisdom Keep up with the course Be active and aggressive with the material Economics is like skiing. What is a Market? The Demand Curve 3 One definition is that a market is a mechanism by which buyers and sellers interact to determine the price and quantity of a good or service. A market may be a physical place or may just exist electronically. A market may be centralized, such as the NYSE, or decentralized, such as the market for labor. But in a market, prices get determined for every good traded. Prices represent the terms on which people are voluntarily exchange goods. And prices send critical signals to buyers and sellers. Prices are the balance wheel of the market mechanism. 4 Quantity demanded is the amount (number of units) of a product that households would buy in a given period if it could buy all that it wanted at the given market price, other things held constant. Households demand decision depends on: 1. The price of the product in question. 2. The income available to households. 3. The households amount of accumulated wealth. 4. The price of other products available to households. 5. The households tastes and preferences. 6. The households expectations about future income, wealth, and prices.

2 Tracing out the Demand Schedule (or Curve) A demand schedule shows the quantities of product that consumers would be willing to buy at different prices. Hypothetical demand schedule for small cup of coffee on Chapel Street on a typical morning. Price Quantity Demanded (per cup) (cups) 5 ceteris paribus or all else equal But for the time being we are going to hold all of these other things constant and just focus on the relationship between the price and quantity demanded. That is, we want to derive a relationship between quantity demanded of a good per time period and the price of that good, holding income, household wealth, other prices, tastes and expectations constant. 6 $ Demand Schedule for Small Coffees Shifts in the demand curve versus movements along the demand curve 7 Changes in the price of a product affect the quantity demanded per period. That s a movement along the demand curve. Changes in any other factor, such as 1. The income available to the households. 2. Households amount of accumulated wealth. 3. The price of other products available to the households. 4. The households tastes and preferences. 5. The households expectations about future income, wealth, and prices. affect the entire demand curve. The entire curve will shift. 8 We often say that an increase in the price of coffee is likely to cause a decrease in the quantity of coffee demanded. However we say that an increase in income is likely to cause an increase in the demand for most goods including coffee. A demand curve always holds everything but the good s own price constant.

3 The Supply Curve Quantity supplied is the amount of a particular product that firms would be willing and able to offer for sale at a particular price during a given time period, other things held constant. A supply schedule shows how much of product firms will sell at various prices. Price Quantity Supplied (per cup) (cups) The supply curve is upward sloping due to the law of diminishing returns If Starbucks wants to produce more coffee, then it will have hire more employees, perhaps get an additional cash register. But each new worker will be less and less efficient than the previous worker. The price needed to then coax out additional coffee output is therefore higher. If the price of coffee rises, holding all other things constant, society can persuade Starbucks to produce and sell more coffee. Other factors that effect the supply curve 1. the cost of production and technological advances 2. price of inputs 3. price of related goods. 4. government policy 5. Special factors 9 $ Supply Schedule for Small Coffees on Chapel Street 10 Shifts in the supply curve versus movements along the supply curve 11 Changes in the price of a product affect the quantity supplied per period. That s a movement along the supply curve. Changes in any other factor, such as 1. technological advances 2. price of inputs 3. price of related goods. 4. government policy 5. Special factors (e.g. weather) affect the entire supply curve. The entire curve will shift. 12 We often say that an increase in the retail price of coffee is likely to cause an increase in the quantity of coffee supplied. However we say that an increase in cost of production is likely to cause an decrease in the supply of coffee. A supply curve always holds everything but the good s own price constant. When other factors change, this will lead to a shift of the supply curve.

4 Equilibrium of Supply and Demand Quantity Quantity Price Demanded Supplied State of pressure (per cup) (cups) (cups) the market on price 13 At any point in time, one of three conditions prevails in a market 1. excess demand or shortage when quantity demanded exceeds quantity supplied at the current price. 2. excess supply or surplus when quantity supplied exceeds quantity demanded at the current price. 3. equilibrium when quantity supplied equals the quantity demanded a the current price. 14 $ excess demand excess demand excess demand excess demand equilibrium excess supply excess supply excess supply excess supply Equilibrium in the Chapel Street Coffee Market 15 Supply and demand are in equilibrium when: The quantity that consumers are willing to buy equals equals the quantity that firms are willing to sell. There is no pressure on prices to go up or down. This is the intersection of the supply and demand curves. 16 Let s Work Through Some Examples 1. A Severe drought in Columbia wipes out this year s coffee crop. 2. Coffee is found to be a good source of a newly discovered nutrient. 3. It becomes terribly uncool to be seen in a coffee shop or with coffee in your hand. 4. Scientists find a way to double the production of coffee beans.

5 The Role of Prices in Answering the Three Fundamental Questions 17 The three fundamental questions: what is produced? how is it produced? and for whom is it produced? How much coffee gets produced? How as a world community do we decide how much coffee to produce? Simple answer: supply and demand. Example: the sinking of Hawaii Example: demand surge All a supplier needs to know is price is high, produce more; price is low, produce less. 18 Do we all get an equal vote in deciding how much gets produced? No. There is a kind of proportional representation in which the influence of each person or country is not necessarily fixed or shared equally. Representation is strictly proportional to a person s or country s wealth. Influence is exerted by offering to exchange wealth for goods and services that are desired. Elasticities Prices also determine how production is organized. Think about production will change when these countries become more developed. For whom does coffee get produced? Ultimately it is the power of the purse. In general, the goods and services each person receives are payments for the factors of production each person owns. That is they are payments for the land we rent, the labor we sell, the capital we rent. We want to know the sensitivity of quantity demanded or supplied to changes in prices. Elasticity is a measure of the responsiveness of quantity demanded or quantity supplied to one of its determinants. More precisely, it is the percentage change in one variable resulting from a 1-percent increase in another. Price elasticity of demand is the percentage change in quantity demanded of a good resulting from a 1-percent increase in its price. It is a measure of how much the quantity demanded of a good responds to a change in the price of that computed as the percentage change in quantity demanded divided by the percentage change in price

6 Example: Suppose that an increase in the price of coffee from $2.00 per cup to $2.20 per cup causes the amount of coffee you buy to fall from 10 to 8 cups per week. What is your price elasticity of demand for coffee? 21 Some notation: The Greek capital letter is delta. It means change in. E p = Price elasticity of demand Percentage change in quantity demanded = Percentage change in price = % Q % P = Q/Q P/P = P Q Q P 22 Percentage change in price = % P =( )/ = 10 percent Percentage change in quantity demanded = % Q = (10 8)/ = 20 percent E p = Price elasticity of demand Percentage change in quantity demanded = Percentage change in price 20 percent = 10 percent =2 Some more definitions 23 Elasticities are unitless. It doesn t matter whether prices are measured in dollars or euros. It doesn t matter whether quantities are measured in bushels or gallons. Because the quantity demanded of a good is negatively related to its price, the percentage change in quantity will always have an opposite sign as the percentage change in price. Thus the price elasticity of demand is usually a negative number. We usually just report the absolute value. When the price elasticity is greater than 1 in absolute value, we say that demand is price elastic. If the price elasticity is less than 1 in absolute value, we say that demand is price inelastic. What determines whether demand for a good is price elastic or inelastic? necessities versus luxuries availability of close substitutes time horizon (short-run versus long-run) 24 Infinitely elastic demand Consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity of demand drops to zero, while for any lower price the quantity demanded increases without limit. Completely inelastic demand Consumers will buy a fixed quantity of a good regardless of the price. Income elasticity of demand Percentage change in the quantity demanded resulting from a 1-percent increase in income Cross-price elasticity of demand Percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another. The sign on the cross-price elasticity depends on whether the two goods are substitutes or complements. If two goods are substitutes, then an increase in the price of one leads to an increase in quantity demanded in the other. Thus the cross price elasticity will be positive. If two goods are complements, then an increase in the price of one leads to an decrease in quantity demanded in the other. Thus the cross price elasticity will be negative.

7 Linear demand curves A commonly used form of the demand curve is the linear demand curve, represented by the equation Q = a bp, where a and b are positive constants. In this equation, the constant a embodies the effects of all other factors (e.g. income, prices of all other goods) than price that affect demand for the good. The coefficient b, which is the slope of the demand curve, reflects how the price affects the quantity demanded. But b is not the elasticity of demand. It is the slope. Mathematically b = Q P What is the elasticity? E p = P Q Q P = P Q b 25 Price elasticity of supply Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price. 26 With a linear demand curve, the elasticity varies over the demand curve In the region between Q = 0 and the midpoint Q = a/2, the price elasticity of demand is between and 1. This is the elastic region of the demand curve. In the region between Q = a/2 and Q = a, the price elasticity of demand is between 1 and 0. This is the inelastic region of the demand curve. The slope of the demand curve is not necessarily the same thing as the elasticity. The slope depends on the units used to measure the price and the quantity. Thus comparisons of slopes across goods depends on the units of measurement (e.g. using pennies or dollars to measure prices) Since elasticities are ratios of percentages, they do not depend on the units used to measure prices or quantities. We could go over linear supply curves, but we won t. Long-run versus short-run demand elasticities Consumers cannot always adjust their purchasing decisions instantly in response to a change in price. For example, if there is an increase in the price of gasoline consumers can adjust the demand for gasoline in the short-run by simply driving less. But over time consumers can reduce their consumption of gasoline even further by purchasing smaller, more fuel efficient cars. They could also move closer to their work or move closer to public transportation. The long-run demand curve pertains to the period of time in which consumers fully adjust their purchase decisions to changes in price. The short-run demand curve pertains to the period of time during which consumers can not fully adjust their purchase decisions to changes in price

8 29 In the case of gasoline, we would expect the long-run demand to flatter or more price-elastic than the short-run. The opposite can hold true for large goods in which consumers have more control in the timing of their purchases. Classic example is automobiles. If the price of automobiles shoot up, demand may fall considerably, as consumers hold on to their old cars and wait the high price period to end. But in the long run, eventually everyone must replace the cars demand will pick up again. So we will think that in the long-run demand for cars is less elastic than in the short-run. 30 Long-run versus short-run supply elasticities In general most firms faces capacity constraints in the short-run. If demand for their goods increases there is only so much they can produce. Think of a New Haven restaurant. There are only so many tables that can be fit into a particular space. At some point supply is completely inelastic. But if demand for a particular restaurant remains strong, in the longrun new space can be built and supply can increase. In most cases, long-run supply is more elastic than short-run supply. The Price of Gasoline in the Long-Run 31 What do you think the price of gasoline will be ten years from now?

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

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

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

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

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

Elasticity and Its Application

Elasticity and Its Application Elasticity and Its Application Chapter 5 All rights reserved. Copyright 2001 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

More information

Elasticities of Demand and Supply

Elasticities of Demand and Supply 1 CHAPTER CHECKLIST Elasticities of Demand and Supply Chapter 5 1. Define, explain the factors that influence, and calculate the price elasticity of demand. 2. Define, explain the factors that influence,

More information

Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity...

Elasticity. Ratio of Percentage Changes. Elasticity and Its Application. Price Elasticity of Demand. Price Elasticity of Demand. Elasticity... Elasticity and Its Application Chapter 5 All rights reserved. Copyright 21 by Harcourt, Inc. Requests for permission to make copies of any part of the work should be mailed to: Permissions Department,

More information

Elasticity: The Responsiveness of Demand and Supply

Elasticity: The Responsiveness of Demand and Supply Chapter 6 Elasticity: The Responsiveness of Demand and Supply Chapter Outline 61 LEARNING OBJECTIVE 61 The Price Elasticity of Demand and Its Measurement Learning Objective 1 Define the price elasticity

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

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

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

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

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

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

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

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

Supply, Demand, Equilibrium, and Elasticity

Supply, Demand, Equilibrium, and Elasticity The Meaning of Supply Supply describes the available goods and services in an economy. In a freemarket economy like the United States, firms tend to be the economic agents producing goods and services

More information

a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price elastic

a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price elastic Things to know about elasticity. 1. Price elasticity of demand a. Meaning: The amount (as a percentage of total) that quantity demanded changes as price changes. b. Factors that make demand more price

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

2011 Pearson Education. Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities

2011 Pearson Education. Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities 2011 Pearson Education Elasticities of Demand and Supply: Today add elasticity and slope, cross elasticities What Determines Elasticity? Influences on the price elasticity of demand fall into two categories:

More information

1. If the price elasticity of demand for a good is.75, the demand for the good can be described as: A) normal. B) elastic. C) inferior. D) inelastic.

1. If the price elasticity of demand for a good is.75, the demand for the good can be described as: A) normal. B) elastic. C) inferior. D) inelastic. Chapter 20: Demand and Supply: Elasticities and Applications Extra Multiple Choice Questions for Review 1. If the price elasticity of demand for a good is.75, the demand for the good can be described as:

More information

Economics 100 Exam 2

Economics 100 Exam 2 Name: 1. During the long run: Economics 100 Exam 2 A. Output is limited because of the law of diminishing returns B. The scale of operations cannot be changed C. The firm must decide how to use the current

More information

http://ezto.mhecloud.mcgraw-hill.com/hm.tpx

http://ezto.mhecloud.mcgraw-hill.com/hm.tpx Page 1 of 17 1. Assume the price elasticity of demand for U.S. Frisbee Co. Frisbees is 0.5. If the company increases the price of each Frisbee from $12 to $16, the number of Frisbees demanded will Decrease

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

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 3 - Demand and Supply - Sample Questions Answers are at the end fo this file MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A relative

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

Elasticities of Demand

Elasticities of Demand rice Elasticity of Demand 4.0 rinciples of Microeconomics, Fall 007 Chia-Hui Chen September 0, 007 Lecture 3 Elasticities of Demand Elasticity. Elasticity measures how one variable responds to a change

More information

The fundamental question in economics is 2. Consumer Preferences

The fundamental question in economics is 2. Consumer Preferences A Theory of Consumer Behavior Preliminaries 1. Introduction The fundamental question in economics is 2. Consumer Preferences Given limited resources, how are goods and service allocated? 1 3. Indifference

More information

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts

7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Chapter. Key Concepts Chapter 7 AGGREGATE SUPPLY AND AGGREGATE DEMAND* Key Concepts Aggregate Supply The aggregate production function shows that the quantity of real GDP (Y ) supplied depends on the quantity of labor (L ),

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

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

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

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. Econ 201 Practice Test 1 Professor V. Tremblay MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Scarcity can best be defined as a situation in which:

More information

OVERVIEW. 2. If demand is vertical, demand is perfectly inelastic. Every change in price brings no change in quantity.

OVERVIEW. 2. If demand is vertical, demand is perfectly inelastic. Every change in price brings no change in quantity. 7 PRICE ELASTICITY OVERVIEW 1. The elasticity of demand measures the responsiveness of 1 the buyer to a change in price. The coefficient of price elasticity is the percentage change in quantity divided

More information

Supply and Demand Fundamental tool of economic analysis Used to discuss unemployment, value of $, protection of the environment, etc.

Supply and Demand Fundamental tool of economic analysis Used to discuss unemployment, value of $, protection of the environment, etc. Supply and emand Fundamental tool of economic analysis Used to discuss unemployment, value of $, protection of the environment, etc. Chapter Outline: (a) emand is the consumer side of the market. (b) Supply

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

ANSWERS TO END-OF-CHAPTER QUESTIONS

ANSWERS TO END-OF-CHAPTER QUESTIONS ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 Explain what relationships are shown by (a) the consumption schedule, (b) the saving schedule, (c) the investment-demand curve, and (d) the investment schedule.

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

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

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

Week 1: Functions and Equations

Week 1: Functions and Equations Week 1: Functions and Equations Goals: Review functions Introduce modeling using linear and quadratic functions Solving equations and systems Suggested Textbook Readings: Chapter 2: 2.1-2.2, and Chapter

More information

PRODUCTION. 1The Surplus

PRODUCTION. 1The Surplus 1The Surplus 2 The US economy produces an amazing number of different products: thousands of different foods, countless movies, dozens of different type cars, hundreds of entertainment products, dozens

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

How to Study for Class 4: The Determinants of Demand and Supply

How to Study for Class 4: The Determinants of Demand and Supply 1 How to Study for Class 4: The Determinants of Demand and Supply Chapter 4 introduces the factors that will shift the shift plus two new elasticity concepts. 1. Begin by looking over the Objectives listed

More information

Study Questions for Chapter 9 (Answer Sheet)

Study Questions for Chapter 9 (Answer Sheet) DEREE COLLEGE DEPARTMENT OF ECONOMICS EC 1101 PRINCIPLES OF ECONOMICS II FALL SEMESTER 2002 M-W-F 13:00-13:50 Dr. Andreas Kontoleon Office hours: Contact: a.kontoleon@ucl.ac.uk Wednesdays 15:00-17:00 Study

More information

Pre-Test Chapter 25 ed17

Pre-Test Chapter 25 ed17 Pre-Test Chapter 25 ed17 Multiple Choice Questions 1. Refer to the above graph. An increase in the quantity of labor demanded (as distinct from an increase in demand) is shown by the: A. shift from labor

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

The Cost of Production

The Cost of Production The Cost of Production 1. Opportunity Costs 2. Economic Costs versus Accounting Costs 3. All Sorts of Different Kinds of Costs 4. Cost in the Short Run 5. Cost in the Long Run 6. Cost Minimization 7. The

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

Elasticity. Definition of the Price Elasticity of Demand: Formula for Elasticity: Types of Elasticity:

Elasticity. Definition of the Price Elasticity of Demand: Formula for Elasticity: Types of Elasticity: Elasticity efinition of the Elasticity of emand: The law of demand states that the quantity demanded of a good will vary inversely with the price of the good during a given time period, but it does not

More information

Practice Questions Week 8 Day 1

Practice Questions Week 8 Day 1 Practice Questions Week 8 Day 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The characteristics of a market that influence the behavior of market participants

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

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost:

or, put slightly differently, the profit maximizing condition is for marginal revenue to equal marginal cost: Chapter 9 Lecture Notes 1 Economics 35: Intermediate Microeconomics Notes and Sample Questions Chapter 9: Profit Maximization Profit Maximization The basic assumption here is that firms are profit maximizing.

More information

INTRODUCTION THE LABOR MARKET LABOR SUPPLY INCOME VS. LEISURE THE SUPPLY OF LABOR

INTRODUCTION THE LABOR MARKET LABOR SUPPLY INCOME VS. LEISURE THE SUPPLY OF LABOR INTRODUCTION Chapter 15 THE LBOR MRKET This chapter covers why there are differences in wages: How do people decide how much time to spend working? What determines the wage rate an employer is willing

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

Econ 101: Principles of Microeconomics

Econ 101: Principles of Microeconomics Econ 101: Principles of Microeconomics Chapter 16 - Monopolistic Competition and Product Differentiation Fall 2010 Herriges (ISU) Ch. 16 Monopolistic Competition Fall 2010 1 / 18 Outline 1 What is Monopolistic

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

Introduction to microeconomics

Introduction to microeconomics RELEVANT TO ACCA QUALIFICATION PAPER F1 / FOUNDATIONS IN ACCOUNTANCY PAPER FAB Introduction to microeconomics The new Paper F1/FAB, Accountant in Business carried over many subjects from its Paper F1 predecessor,

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

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

6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3

6. Which of the following is likely to be the price elasticity of demand for food? a. 5.2 b. 2.6 c. 1.8 d. 0.3 Exercise 2 Multiple Choice Questions. Choose the best answer. 1. If a change in the price of a good causes no change in total revenue a. the demand for the good must be elastic. b. the demand for the good

More information

3.3 Applications of Linear Functions

3.3 Applications of Linear Functions 3.3 Applications of Linear Functions A function f is a linear function if The graph of a linear function is a line with slope m and y-intercept b. The rate of change of a linear function is the slope m.

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

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

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

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

Profit Maximization. 2. product homogeneity

Profit Maximization. 2. product homogeneity Perfectly Competitive Markets It is essentially a market in which there is enough competition that it doesn t make sense to identify your rivals. There are so many competitors that you cannot single out

More information

1 Mathematical Models of Cost, Revenue and Profit

1 Mathematical Models of Cost, Revenue and Profit Section 1.: Mathematical Modeling Math 14 Business Mathematics II Minh Kha Goals: to understand what a mathematical model is, and some of its examples in business. Definition 0.1. Mathematical Modeling

More information

ECN 221 Chapter 5 practice problems This is not due for a grade

ECN 221 Chapter 5 practice problems This is not due for a grade ECN 221 Chapter 5 practice problems This is not due for a grade 1. Assume the price of pizza is $2.00 and the price of Beer is $1.00 and that at your current levels of consumption, the Marginal Utility

More information

Common sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility.

Common sense, and the model that we have used, suggest that an increase in p means a decrease in demand, but this is not the only possibility. Lecture 6: Income and Substitution E ects c 2009 Je rey A. Miron Outline 1. Introduction 2. The Substitution E ect 3. The Income E ect 4. The Sign of the Substitution E ect 5. The Total Change in Demand

More information

CHAPTER 4 Elasticity, Consumer Surplus, and Producer Surplus

CHAPTER 4 Elasticity, Consumer Surplus, and Producer Surplus Part Two: Microeconomics of Product Markets CHAPTER 4 Elasticity, Consumer Surplus, and Producer Surplus 2010 McGraw-Hill Ryerson Ltd. Slides prepared by Bruno Fullone, George Brown College 1 In this chapter

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

5. Suppose demand is perfectly elastic, and the supply of the good in question

5. Suppose demand is perfectly elastic, and the supply of the good in question ECON 1620 Basic Economics Principles 2010 2011 2 nd Semester Mid term test (1) : 40 multiple choice questions Time allowed : 60 minutes 1. When demand is inelastic the price elasticity of demand is (A)

More information

Chapter 6. Elasticity: The Responsiveness of Demand and Supply

Chapter 6. Elasticity: The Responsiveness of Demand and Supply Chapter 6. Elasticity: The Responsiveness of Demand and Supply Instructor: JINKOOK LEE Department of Economics / Texas A&M University ECON 202 504 Principles of Microeconomics Elasticity Demand curve:

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

Econ 201 Exam 1 F2002 Professor Phil Miller Name: Student Number:

Econ 201 Exam 1 F2002 Professor Phil Miller Name: Student Number: Econ 201 Exam 1 F2002 Professor Phil Miller Name: Student Number: Multiple Choice (3 points each) Directions: Identify the letter of the choice that best completes the statement or answers the question.

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

CHAPTER 5 WORKING WITH SUPPLY AND DEMAND Microeconomics in Context (Goodwin, et al.), 2 nd Edition

CHAPTER 5 WORKING WITH SUPPLY AND DEMAND Microeconomics in Context (Goodwin, et al.), 2 nd Edition CHAPTER 5 WORKING WITH SUPPLY AND DEMAND Microeconomics in Context (Goodwin, et al.), 2 nd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in

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

Demand. Lecture 3. August 2015. Reading: Perlo Chapter 4 1 / 58

Demand. Lecture 3. August 2015. Reading: Perlo Chapter 4 1 / 58 Demand Lecture 3 Reading: Perlo Chapter 4 August 2015 1 / 58 Introduction We saw the demand curve in chapter 2. We learned about consumer decision making in chapter 3. Now we bridge the gap between the

More information

Quantity of trips supplied (millions)

Quantity of trips supplied (millions) Taxes chapter: 7 1. The United tates imposes an excise tax on the sale of domestic airline tickets. Let s assume that in 2010 the total excise tax was $6.10 per airline ticket (consisting of the $3.60

More information

Pricing I: Linear Demand

Pricing I: Linear Demand Pricing I: Linear Demand This module covers the relationships between price and quantity, maximum willing to buy, maximum reservation price, profit maximizing price, and price elasticity, assuming a linear

More information

Chapter 4 Elasticities of demand and supply. The price elasticity of demand

Chapter 4 Elasticities of demand and supply. The price elasticity of demand Chapter 4 Elasticities of demand and supply The price elasticity of demand measures the sensitivity of the quantity demanded of a good to a change in its price It is defined as: % change in quantity demanded

More information

AP Microeconomics Chapter 12 Outline

AP Microeconomics Chapter 12 Outline I. Learning Objectives In this chapter students will learn: A. The significance of resource pricing. B. How the marginal revenue productivity of a resource relates to a firm s demand for that resource.

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. Chap 13 Monopolistic Competition and Oligopoly These questions may include topics that were not covered in class and may not be on the exam. MULTIPLE CHOICE. Choose the one alternative that best completes

More information

I d ( r; MPK f, τ) Y < C d +I d +G

I d ( r; MPK f, τ) Y < C d +I d +G 1. Use the IS-LM model to determine the effects of each of the following on the general equilibrium values of the real wage, employment, output, the real interest rate, consumption, investment, and the

More information

Economics. Worksheet 11.1. Circular Flow Simulation

Economics. Worksheet 11.1. Circular Flow Simulation Worksheet 11.1 Circular Flow Simulation Please note this is a class activity. Why not suggest it to your teacher? Objective: To understand how productive resources, goods and services and money flow from

More information

Practice Questions Week 2 Day 1 Multiple Choice

Practice Questions Week 2 Day 1 Multiple Choice Practice Questions Week 2 Day 1 Multiple Choice 1. When individuals come together to buy and sell goods and services, they form a(n) a. economy b. market c. production possibilities frontier d. supply

More information

The labor market. National and local labor markets. Internal labor markets. Primary and secondary labor markets. Labor force and unemployment

The labor market. National and local labor markets. Internal labor markets. Primary and secondary labor markets. Labor force and unemployment The labor market The labor market differs from most product markets in several important ways. Among these differences are: labor services are rented, not sold, labor productivity is affected by pay and

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

chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis

chapter >> Making Decisions Section 2: Making How Much Decisions: The Role of Marginal Analysis chapter 7 >> Making Decisions Section : Making How Much Decisions: The Role of Marginal Analysis As the story of the two wars at the beginning of this chapter demonstrated, there are two types of decisions:

More information

Consumers face constraints on their choices because they have limited incomes.

Consumers face constraints on their choices because they have limited incomes. Consumer Choice: the Demand Side of the Market Consumers face constraints on their choices because they have limited incomes. Wealthy and poor individuals have limited budgets relative to their desires.

More information

The formula to measure the rice elastici coefficient is Percentage change in quantity demanded E= Percentage change in price

The formula to measure the rice elastici coefficient is Percentage change in quantity demanded E= Percentage change in price a CHAPTER 6: ELASTICITY, CONSUMER SURPLUS, AND PRODUCER SURPLUS Introduction Consumer responses to changes in prices, incomes, and prices of related products can be explained by the concept of elasticity.

More information

COST THEORY. I What costs matter? A Opportunity Costs

COST THEORY. I What costs matter? A Opportunity Costs COST THEORY Cost theory is related to production theory, they are often used together. However, the question is how much to produce, as opposed to which inputs to use. That is, assume that we use production

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

ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition

ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter 4 ELASTICITY Microeconomics in Context (Goodwin, et al.), 3 rd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in Chapter 3. You will

More information

NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008

NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Midterm II April 30, 2008 NAME: INTERMEDIATE MICROECONOMIC THEORY SPRING 2008 ECONOMICS 300/010 & 011 Section I: Multiple Choice (4 points each) Identify the choice that best completes the statement or answers the question. 1.

More information

4. According to the graph, assume that Cliff and Paul were both producing wheat and corn, and each were dividing their time equally between the two. T

4. According to the graph, assume that Cliff and Paul were both producing wheat and corn, and each were dividing their time equally between the two. T 1. Your professor loves his work, teaching economics. He has been offered other positions in the corporate world making 25 percent more, but has decided to stay in teaching. His decision would not change

More information

The Economic Problem: Scarcity and Choice. What is Production?

The Economic Problem: Scarcity and Choice. What is Production? The Economic Problem: Scarcity and Choice #1 What is Production? Production is the process by which resources are transformed into useful forms. Resources, or inputs, refer to anything provided by nature

More information