Extra Questions Flashcards
Define market supply.
Total quantity supplied by the industry by summing all individual supply schedules.
Define marginal analysis.
Thinking ‘at the margin’ using marginal cost/benefit, add one more unit to decision making
Define luxury good.
A good with an EY (income) > 1
Define production possibilities.
Combination/set of outputs that economy can produce given available factors of production and tech.
Define disequilibrium
Market inefficiency caused when QD ≠ QS
Andrew wants to know what would happen to an efficient market if the equilibrium price stopped acting as a signal to guide buyers and sellers. Explain.
With no equilibrium price (or quantity) there will always be supply/demand mismatch leading to perpetual surplus and shortages.
Discussion on augmented market inefficiencies needed:
e.g. rise of black markets, abnormally elastic supply/demand curves, willingness to pay dropping + production possibilities approaching zero, huge opportunity cost and scarcity, etc.
Recognize that infinite deadweight loss may occur as an artificial market distortion from no price signal – uncertain incentives for both buyer/seller
Jasmine says that if the slope of a linear demand function were -3, by graphing the income elasticity of demand for a normal good the slope would be constant. Explain to her if this assumption is justified.
Define “income elasticity of demand” - %Δ in QD over %Δ in Y
No, Jasmine’s assumption is not justified. A linear slope for demand curve does not equal a linear slope for elasticity.
Percentage change in quantity demanded over percent change in income implies that very rarely will there be a point where the elasticity becomes linear - only when the percent changes are equal.
Even among normal goods, income elasticities vary substantially in size - cannot assume that graphs of elasticity will look the same to each other.
Valerie is eager to see if there is a correlation between grades in Prof G’s class and the number of Lululemon products owned. Explain how, if possible, she can apply an economic index to confirm this.
Define ‘economic index’ - statistical measure of changes in a representative group of individual date points OR relative value divided by base value.
An index only shows changes relative to a base (e.g., price indices). Thus, an economic index cannot be realistically applied to generate economic insight.
Confirmation vs. refutation test - need sources of empirical evidence/positive analysis to examine correlations and causations.
Index could be potentially used, but need to graph a time series and extrapolate/use other statistical analysis.
Julie heard an old proverb from Prof G yesterday: “a drought around the world raises the total revenue that farmers receive from sales of grain, but a drought only in Alberta reduces the total revenue that Alberta farmers receive”. Explain.
World drought: each economy producing grain operates as a price taker in scope.
A very inelastic demand curve suggests that a leftward shift in the supply curve with increasing price can be enjoyed by producers - especially if grain demand picks up.
Alberta drought: each farmer faces individual marginal cost and magnitude of shifts in demand/supply curves much heavier than world economy.
For elastic demand curves, total revenue will move in the opposite direction as the price - price increase from shifting supply is bad.
Can show both outcomes in a well labelled diagram suggesting differences in elasticity and changes in price.
Eleanor is a farmer in Alberta and wants to know if she could argue with the government to keep her profitable. Discuss ways that she could go about doing this.
Ask government to impose a high binding price floor so farmers are obligated to sell at higher price while offering excess supply for government to purchase back.
Examine determinants of shifts in supply curve - government can offer subsidy to Eleanor or strictly regulate input markets to impose price ceilings.
Ensure price elasticity of supply is elastic enough, perhaps through application of new technologies for production.
Suppose that demand for tomatoes is given by QD = 100 – 2P + 0.5Y + 3PA, where P = price of tomatoes, Y = national income, and PA = price of avocados, and supply is given as QS = 4P. Hilton says that when inflation increases both Y and PA by 20 and 6 respectively, people will buy fewer tomatoes. Is he correct? Explain.
Solve for equilibrium price and quantity, i.e.
QD =100–2P+0.5(20)+3(6)→ QD =128–2P and QS =4P
Thus, P = 128/6 and Q = 256/3
This Q can be compared to original to see the difference
Hilton is not correct:
In comparing the efficient outcome with inflation and without inflation, we see that the original equilibrium quantity of tomatoes is lower than after increased prices
Qualitative analysis – tomatoes and avocados are weak substitutes, increasing PA would increase QD of tomatoes with income ceteris paribus
