Chapter 4

Question 1

A consumers willingness to pay for a good is

Answer 1

the maximum price at which he or she would buy that good

Question 2

define individual consumer surplus

Answer 2

the gain to an individual buyer from the purchase of a good; the difference between the price paid and what the buyer is willing to pay

Question 3

total consumer surplus

Answer 3

the sum of individual consumer surpluses of all buyers in a market. Total area above price paid and the demand curve

Question 4

define producer surplus

Answer 4

the difference between market price and the price at which firms are willing to supply the product

Question 5

define individual producer surplus

Answer 5

the net gain to an individual seller from selling a good. It is equal to the difference between the price received and the seller’s cost

Question 6

define total producer surplus

Answer 6

: the sum of individual producer surpluses of all the sellers in a market.

Question 7

where on the graph is producer surplus found

Answer 7

bottom portion, below the price and above the supply curve

Question 8

define total surplus

Answer 8

the sum of the producer and consumer surpluses

Question 9

define the statement ‘markets are usually efficient’

Answer 9

there is no way to make some people better off without making other people worse off

Question 10

markets are usually efficient because they maximize ________ ______

Answer 10

total surplus

Question 11

what are 4 ways used to increase total surplus but are unsuccessful

Answer 11

reallocate consumption among consumers
reallocate sales among sellers
change the quantity traded

Question 12

what are things that make competitive markets efficient

Answer 12

1. allocate consumption to buyers who value it most
2. allocate sales to sellers who value the right to sell(lowest price)
3. all transactions are mutually beneficial (consumer values the good more than the seller does)
4. no mutually beneficial transactions are missed

Question 13

what does elasticity measure

Answer 13

the response to changes in prices or income

Question 14

a demand is ________ when an increase in price reduces the quantity demanded a lot

Answer 14

elastic

Question 15

a demand is _______ when an increase in price reduces the quantity demanded just a little

Answer 15

inelastic

Question 16

price elasticity =

Answer 16

% change in quantity demanded / % change in price

Question 17

what is the formula for the mid-point method to calculate the efficiency of demand

Answer 17

Ed = (△Q / Qavg) (Pavg / △P)

Question 18

what are the other two equations that calculate demand efficiency that are not the mid-point method

Answer 18

initial: Ed = (△Q / Qo) (Po / △P)
second point: Ed = (△Q / Q1) (P1 / △P)

Question 19

a good can have a price elasticity as low as ____ or as high as ____

Answer 19

zero
infinity

Question 20

if a price elasticity < 1, the demand curve is _______

Answer 20

inelastic

Question 21

if a price elasticity >1, the demand curve is _______

Answer 21

elastic

Question 22

if a price elasticity =1, the demand curve is ________

Answer 22

unit-elastic

Question 23

how to calculate total revenue

Answer 23

TR = PQ
total revenue = price times quantity sold

Question 24

when a seller raises the price of a good, there are two countervailing effects

Answer 24

a price effect and a quantity effect

Question 25

what is the price effect

Answer 25

after a price increases, each unit sells at a higher price, which tends to raise revenue

Question 26

what is the quantity effect

Answer 26

after a price increase, fewer units are sold, which tends to lower revenue

Question 27

when demand is _______, the price effect dominates the quantity effect

Answer 27

inelastic

Question 28

when demand is ________, the quantity effect dominates the price effect

Answer 28

elastic

Question 29

when demand is ______, the quantity effect equals the price effect

Answer 29

unit elastic

Question 30

For price effect and demand effect, does Total revenue fall or rise

Answer 30

Price effect: TR rises Quantity effect: TR falls

Question 31

When the price for a necessity increases, does it change the quantity demanded

Answer 31

no

Question 32

When the price for a luxury increases, does it change the quantity demanded

Answer 32

yes

Question 33

fewer substitutes make it harder for consumers to adjust quantity when price changes, so demand is_________

Answer 33

inelastic

Question 34

many substitutes make it easier for consumers to switch brands when prices change, so demand is ________

Answer 34

elastic

Question 35

describe the third factor that determines the price elasticity of demand: The share of income spent on the good

Answer 35

It feels cheaper when we spend a smaller share of income on the good. It feels more expensive when we spend a greater share of income on the good.

Question 36

Fourth factor: Time elapsed since the price change: Less time to adjust means _______ elasticity

Answer 36

lower

Question 37

What are the four factors that determine the price elasticity of demand

Answer 37

1. whether the good is a necessity or a luxury 2. The availability of close substitutes 3. The share of income spent on the good 4. Time elapsed since the price change No subs in thomas

Question 38

What does the cross price elasticity of demand measure

Answer 38

how sensitive the quantity demanded of good A is to the price of good B

Question 39

equation for cross price elasticity of demand

Answer 39

% change in quantity of A demanded / % change in price of B

Question 40

For substitutes, cross price elasticity of demand is _______

Answer 40

positive

Question 41

For complements, cross price elasticity of demand is ________

Answer 41

negative

Question 42

The income elasticity of demand measures

Answer 42

how sensitive the quantity demanded of a good is to changes in income

Question 43

equation for income elasticity of demand

Answer 43

= %change in quantity demand / % change in income

Question 44

The income elasticity of demand can be used to

Answer 44

distinguish normal from inferior goods

Question 45

for normal goods, income elasticity is _________

Answer 45

positive

Question 46

for inferior goods, income elasticity is ___________

Answer 46

negative

Question 47

what is the price elasticity of supply

Answer 47

= %change in quantity supplied / % change in price

Question 48

supply curve is _______ if a rise in price increases the quantity supplied a lot

Answer 48

elastic

Question 49

supply curve is ________ if a rise in price increases the quantity supplied just a little

Answer 49

inelastic

Question 50

what are the two factors that determine the price elasticity of supply

Answer 50

availability of inputs and time

Question 51

Availability of inputs: If an increase in production is very expensive, then supply will be _______

Answer 51

inelastic

Question 52

Availability of inputs: If production can be increased cheaply, then the supply will be _______

Answer 52

elastic

Question 53

Time: ______-run elasticity of supply is usually higher than the ____-run elasticity

Answer 53

long short

Question 54

Time: Price elasticity of supply increases as producers have more _____ to respond to price changes

Answer 54

time

Question 55

demand is perfectly inelastic when E =

Answer 55

0

Question 56

demand is perfectly elastic when E =

Answer 56

infinity