Chapter 2

Question 1

What is the definition of demand?

Answer 1

Quantity of a good consumers are willing and able to buy at a given price in a given time period.

Question 2

What does the Law of Demand state?

Answer 2

As price falls, quantity demanded increases (inverse relationship).

Question 3

What is the shape of the demand curve?

Answer 3

Downward sloping.

Question 4

What is the substitution effect?

Answer 4

Lower price makes a good more attractive than alternatives.

Question 5

What is the income effect?

Answer 5

Lower price increases real purchasing power.

Question 6

List factors that can shift the demand curve.

Answer 6

• Changes in income (normal vs inferior goods) * Tastes and preferences * Prices of related goods (substitutes and complements) * Expectations of future price changes * Population size and structure.

Question 7

What is the definition of supply?

Answer 7

Quantity of a good producers are willing and able to supply at a given price in a given time period.

Question 8

What does the Law of Supply state?

Answer 8

As price rises, quantity supplied rises (direct relationship).

Question 9

What is the shape of the supply curve?

Answer 9

Upward sloping.

Question 10

List factors that can shift the supply curve.

Answer 10

• Changes in production costs (wages, raw materials) * Improvements in technology * Taxes (indirect) and subsidies * Expectations of future prices * Entry/exit of firms in the market.

Question 11

What is the formula for Price Elasticity of Demand (PED)?

Answer 11

PED = % change in Qd / % change in Price.

Question 12

What are the types of Price Elasticity of Demand?

Answer 12

• Elastic (>1) * Inelastic (<1) * Unitary Elastic (=1) * Perfectly Elastic (∞) * Perfectly Inelastic (0).

Question 13

What are determinants of Price Elasticity of Demand?

Answer 13

• Availability of substitutes * Necessity vs luxury * Proportion of income spent * Time period * Addictive nature of product.

Question 14

How is Price Elasticity of Demand used in business and government?

Answer 14

For pricing decisions and tax revenue estimates.

Question 15

What is the formula for Income Elasticity of Demand (YED)?

Answer 15

YED = % change in Qd / % change in Income.

Question 16

What are the types of Income Elasticity of Demand?

Answer 16

• Positive YED (normal goods) * Negative YED (inferior goods).

Question 17

What is the formula for Cross Elasticity of Demand (XED)?

Answer 17

XED = % change in Qd of Good A / % change in Price of Good B.

Question 18

What are the types of Cross Elasticity of Demand?

Answer 18

• Positive XED (substitutes) * Negative XED (complements) * Zero XED (unrelated goods).

Question 19

What is the definition of Price Elasticity of Supply (PES)?

Answer 19

Responsiveness of quantity supplied to a change in price.

Question 20

What is the formula for Price Elasticity of Supply (PES)?

Answer 20

PES = % change in Qs / % change in Price.

Question 21

What are the types of Price Elasticity of Supply?

Answer 21

• PES > 1 (elastic supply) * PES < 1 (inelastic supply) * PES = 0 (perfectly inelastic) * PES = ∞ (perfectly elastic).

Question 22

List determinants of Price Elasticity of Supply.

Answer 22

• Time (short run = more inelastic) * Availability of spare capacity * Stock levels * Ease of factor mobility * Production period.

Question 23

What is market equilibrium?

Answer 23

Point where quantity demanded = quantity supplied.

Question 24

What is the equilibrium price?

Answer 24

Price at which quantity demanded equals quantity supplied.

Question 25

What happens during excess demand?

Answer 25

Upward pressure on price.

Question 26

What happens during excess supply?

Answer 26

Downward pressure on price.

Question 27

What is consumer surplus?

Answer 27

The difference between what consumers are willing to pay and what they actually pay.

Question 28

On a graph, where is consumer surplus represented?

Answer 28

Area under the demand curve and above the market price.

Question 29

What is producer surplus?

Answer 29

The difference between the market price and the minimum price a producer is willing to accept.

Question 30

On a graph, where is producer surplus represented?

Answer 30

Area above the supply curve and below the market price.

Question 31

What is total surplus?

Answer 31

Consumer Surplus + Producer Surplus.

Question 32

What maximizes total surplus?

Answer 32

Perfectly competitive markets (no market failure).

Question 33

What effect does a tax have on surpluses?

Answer 33

Reduces both consumer and producer surplus → causes deadweight loss.

Question 34

What effect does a subsidy have on surpluses?

Answer 34

Increases both surpluses → encourages consumption/production.

Question 35

What key diagrams should be mastered?

Answer 35

* Demand & supply shifts * PED/PES graphs * Equilibrium shift due to supply/demand changes * Consumer and producer surplus areas * Impact of taxes/subsidies on supply/demand.