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law of demand

Other things being equal, as price falls, the quantity demanded rises and as price rises, the quantity demanded falls. What is this inverse relationship is called?. law of demand.

alexandra-buck
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law of demand

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  1. Other things being equal, as price falls, the quantity demanded rises and as price rises, the quantity demanded falls. What is this inverse relationship is called? law of demand

  2. What is the schedule or curve called which represents the willingness of buyers in a specific period to purchase a particular product at each of various prices? demand

  3. What is it called when a buyer of a product, in a specific time period, derives less satisfaction from each successive unit? • diminishing marginal utility

  4. What are the five basic determinants of demand? • (1) Consumer’s tastes (preferences); • (2) number of buyers; (3) consumer’s incomes; (4) prices of related goods; (5) consumer expectations

  5. What are products called whose demand varies directly with money income? • Superior, or normal goods

  6. How will a decrease in raw materials effect the equilibrium price and quantity in a market? • Equilibrium price will increase and quantity will decrease

  7. A good or service whose consumption declines as income rises, prices held constant is called? • An inferior good

  8. A good that can be used in place of another good is called? (an increase in price will increase demand for the other, and vice versa.) • A substitute good

  9. A good used together with another good (typically, demanded jointly) is called? • A complementary good

  10. According to the law of supply, when price rises what will happen to the quantity being supplied? • Supply rises

  11. What is the price where the intentions of buyers and sellers match (the price where quantity demanded equals quantity supplied)? • Equilibrium price

  12. What is the result when the production of a good is done in the least costly way? • productive efficiency

  13. What is it called when the output of each product at its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized? • allocative efficiency

  14. When the government sets the maximum legal price a seller may charge for a product or service this is called what? • A price ceiling

  15. What is it called when a minimum price is fixed by the government? • A price floor

  16. The responsiveness of consumers to a change in price is called______. Price elasticity of demand

  17. What is the formula for the coefficient of price elasticity of demand (Ed)? How do you change it for supply (Es)? % Change in QD ÷ % Change in P For supply just substitute QS for QD

  18. What formula describes the “midpoints method” of calculating Ed or Es? Q2-Q1/((Q1+Q2)/2) ÷ P2-P1/((P1+P2)/2) Usually expressed as absolute value

  19. When does Ed tell us demand is elastic? Unitary elastic? Inelastic? Ed > 1 means elastic Ed = 1 means unitary elastic Ed < 1 means inelastic

  20. What is unit elastic really mean? That a change in price will result in a corresponding change in demand %ΔQD = %ΔP

  21. What does an Ed = 0 mean? What about Ed = ∞? Ed = 0 means demand is perfectly inelastic (think diabetics and insulin) Ed = ∞ demand is perfectly elastic

  22. Total revenue (TR) is determined by multiplying the product price by what? • Quantity sold • TR = P x Q

  23. How do you use the total revenue (TR) test to determine elasticity? When TR is moving the same direction as price demand is inelastic, when TR is moving opposite direction from price demand is elastic

  24. Following the TR Test – what will happen to TR if price is lowered and demand is inelastic? Demand is elastic? TR will fall if demand is inelastic TR will rise if demand is elastic

  25. Identify three of the primary detrminants of price elasticity of demand. substitutability, price as proportion of income, luxuries vs. necessities, time

  26. What impact does substitutability have on price elasticity of demand? More subsitutes = more elasticity

  27. What impact does price as proportion of income have on price elasticity of demand? The higher the price relative to income, the higher the elasticity for that good for that consumer

  28. What impact does luxury v. necessity have on price elasticity of demand? Luxuries are more elastic, necessities more inelastic

  29. What does the degree of price elasticity of supply depend on? • How easily producers can shift resources between alternative uses.

  30. What impact does time have on price elasticity of demand? Given more time to make decisions and for markets to move, elasticity increases

  31. What impact would overly large crop yields likely have on TR? Prices would be supressed reducing TR, which is why gov’ts often seek to limit production

  32. Products with inelastic demand, so that the taxes don’t adversely effect QD What kinds of products does the government place excise taxes on? Why?

  33. Depending on the industry, it can take suppliers a while to react to changing prices Why is the market period so important to elasticity of supply?

  34. What are the primary differences between short run and long run? Short run: not enough time to change major resources related to production (land, machinery, factories, etc.) Long run allows for this and entry/exit of competitors

  35. What measures the sensitivity of changes in demand of one good with the price of another (usually related) good? Cross elasticity of demand Exy = %ΔQD product x ÷ %ΔP of product y

  36. How can Exy help identify substitutes and complementary goods? Substitutes have positive Exy Complements have negative Exy

  37. Income elasticity of demand Ei = %ΔQD ÷ %Δ income What measures the degree to which consumers respond to a change in their income by buying more or less of a good?

  38. What can Ei help identify normal and inferior goods? Normal goods have positive Ei Inferior goods have negative Ei

  39. If a consumer goes out shopping for a cell phone and expects to spend $250, but finds that the cell phone is on sale for $150? What do economists call this $100 “savings”? consumer surplus

  40. Improvements in technology allows firms to produce units of output with fewer resources causing the supply to increase or decrease? increase

  41. What effect does time have on the elasticity of a product? More time for a consumer to react and make decisions = elastic

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