Unit 4 - Microeconomics

Question 1

When the coefficient of elasticity (% Change in Q / % Change in Price) is less than 1… demand is

Answer 1

Inelastic
Elasticity measures the change market factor as a result of another change in market factor.

Example:
If 3% Price decrease results in 5% increase in Quantity demanded - the demand is ELASTIC
If quantity demanded increased less than 3%, the demand would be INELASTIC.

Question 2

What are the key assumptions in market perfect competition?

Answer 2

1 - Very large # of buyers/sellers act independently. eg. stock market & agricultural markets
2 - Product is homogeneous/standardized. So product of one seller is perfect sub for that of any other; PRICE is the only basis for competition.
3 - Each seller produces immaterial amount of industry’s total output thus cannot influence market price
4 - No barriers to entry/exit from the market exist
5- Every buyer/seller has perfect information

Question 3

What are the characteristics in Monopolistic Competition?

Answer 3

1 - Industry has large # of firms. The # is fewer than in pure competition.
2 - Products are differentiated other than on a basis in price such as quality, brands, styles so advertising is crucial.
3 - Few barriers to entry/exist. First tend to not be large so great economies of scale DO NOT exist. Cost of product differentiation is the most significant entry barrier.

Question 4

An increase in both demand and supply can be always expected to

Answer 4

Increase market-clearing quantity