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Question 1

What is Supply and Demand Analysis?

Answer 1

A powerful tool in economics for analyzing how market forces determine prices and output levels in competitive markets.

Question 2

What is Quantity Demanded (Qd)?

Answer 2

The amount of a good or service consumers are willing and able to purchase during a given period.

Question 3

Name the 6 factors included in most studies of market demand.

Answer 3

• Price of the goods or services (P)
• Income of the consumers (M)
• Price of related goods and services (Pr)
• Taste or preference patterns of the consumers (T)
• Expected price of the product in the future (Pe)
• Number of consumers in the market (N)

Question 4

What is the relationship between price and quantity demanded when all other factors are held constant?

Answer 4

They are inversely related.

Question 5

What are Normal Goods?

Answer 5

Goods for which an increase in income causes consumers to demand more.

Question 6

What are Inferior Goods?

Answer 6

Goods for which an increase in income causes consumers to demand less.

Question 7

What is a Substitute in consumption?

Answer 7

Two goods are substitutes if an increase in the price of one causes consumers to demand more of the other.

Question 8

What is a Complement in consumption?

Answer 8

Two goods are complements if an increase in the price of one causes consumers to demand less of the other.

Question 9

How can consumer expectations affect demand?

Answer 9

Expectations of higher future prices can increase current demand, while expectations of price declines can decrease current demand.

Question 10

What happens to demand when the number of consumers in the market increases?

Answer 10

Demand for a good increases.

Question 11

What does the Intercept Parameter ‘a’ in the demand function represent?

Answer 11

The value of Qd when all other variables are equal to zero.

Question 12

What is a Direct Demand Function?

Answer 12

Shows the relation between quantity demanded and price when other variables are held constant.

Question 13

What is a Demand Schedule?

Answer 13

A table showing a list of possible product prices and the corresponding quantities demanded.

Question 14

What is a Demand Curve?

Answer 14

A graph showing the relation between quantity demanded and price when all other variables are held constant.

Question 15

What is Demand Price?

Answer 15

The maximum price consumers will pay for a specific amount of a good or service.

Question 16

What does the Law of Demand state?

Answer 16

Quantity demanded increases when price falls, and decreases when price rises, holding other factors constant.

Question 17

What is a Change in Quantity Demanded?

Answer 17

A movement along a given demand curve that occurs when the price of the good changes.

Question 18

What is an Increase in Demand?

Answer 18

A change in the demand function that causes an increase in quantity demanded at every price, reflected by a rightward shift in the demand curve.

Question 19

What is a Decrease in Demand?

Answer 19

A change in the demand function that causes a decrease in quantity demanded at every price, reflected by a leftward shift in the demand curve.

Question 20

What are Determinants of Demand?

Answer 20

Variables that change the quantity demanded at each price, determining the location of the demand curve.

Question 21

What is Quantity Supplied (Qs)?

Answer 21

The amount of a good or service offered for sale during a given period.

Question 22

Name the six major variables that affect quantity supplied.

Answer 22

• Price of the good itself (P)
• Prices of inputs used to produce the good (Pi)
• Prices of goods related to production (Pt)
• Level of available technology (T)
• Expectations of future price (Pe)
• Number of firms or productive capacity (F)

Question 23

What are Substitutes in Production?

Answer 23

Goods for which an increase in the price of one good causes producers to increase production of that good and decrease production of another.

Question 24

What are Complements in Production?

Answer 24

Goods for which an increase in the price of one good causes producers to increase production of both goods.

Question 25

What is a General Supply Function?

Answer 25

Shows how all six variables jointly determine the quantity supplied.

Question 26

What is a Supply Schedule?

Answer 26

A table showing a list of possible product prices and the corresponding quantities supplied.

Question 27

What is a Supply Curve?

Answer 27

A graph showing the relation between quantity supplied and price when all other variables are held constant.

Question 28

What is a Shift in Supply?

Answer 28

Occurs only when one of the determinants of supply changes value.

Question 29

What is Elasticity?

Answer 29

A measure of responsiveness of one variable to a change in another variable.

Question 30

What is Perfectly Inelastic demand?

Answer 30

When quantity demanded remains constant even when price changes (e = 0).

Question 31

What is Inelastic demand?

Answer 31

When there is a slight change in quantity demanded as price changes (e < 1).

Question 32

What is Elastic demand?

Answer 32

When there is a big change in quantity demanded as price changes (e > 1).

Question 33

What is Perfectly Elastic demand?

Answer 33

When quantity demanded completely changes to 0 with any price change (e is undefined).

Question 34

What is Unit Elastic demand?

Answer 34

When the change in demand is equivalent to the change in price (e = 1).

Question 35

What is Price Elasticity of Demand?

Answer 35

The elasticity between price and quantity demanded.

Question 36

What is Income Elasticity of Demand?

Answer 36

The elasticity between income and quantity demanded.

Question 37

What is the formula for calculating % ΔQd?

Answer 37

(Q2 - Q1) / ((Q1 + Q2) / 2) ## Footnote Q1 and Q2 are the quantity demanded at the two points.

Question 38

What is the relationship between income and quantity demanded for normal goods?

Answer 38

Higher income raises quantity demanded ## Footnote Quantity demanded and income move in the same direction.

Question 39

What characterizes inferior goods in terms of income elasticity?

Answer 39

Higher income lowers the quantity demanded ## Footnote Quantity demanded and income move in opposite directions.

Question 40

Define Cross-Price Elasticity of Demand.

Answer 40

Elasticity between the SUBSTITUTE and QUANTITY DEMAND (Qd) ## Footnote Measures how the quantity demanded of one good changes as the price of another good changes.

Question 41

What does a positive cross-price elasticity indicate?

Answer 41

The price of good and the quantity of good demanded move in the same direction ## Footnote Indicates substitutes.

Question 42

What does a negative cross-price elasticity indicate?

Answer 42

The price of good and the quantity of good demanded move in opposite direction ## Footnote Indicates complements.

Question 43

What is Price Elasticity of Supply?

Answer 43

Elasticity between the PRICE (P) and QUANTITY SUPPLY (Qs) ## Footnote Measures how much the quantity supplied of a good changes in response to a change in price.

Question 44

What is the formula for calculating % ΔQs?

Answer 44

(Qs2 - Qs1) / ((P1 + P2) / 2) ## Footnote Qs1 and Qs2 are the quantity supplied at the two points.

Question 45

What is the relationship between Total Revenue and Total Cost?

Answer 45

Profit = Total Revenue - Total Cost ## Footnote Total Revenue is price multiplied by quantity of outputs.

Question 46

Define Explicit Cost.

Answer 46

Input costs that require a direct outlay of money ## Footnote Includes cash payments for inputs.

Question 47

Define Implicit Cost.

Answer 47

Costs that do not require outlay of money ## Footnote Includes time, efforts, or depreciation.

Question 48

What is the difference between Economic Profit and Accounting Profit?

Answer 48

Economic Profit is smaller than Accounting Profit ## Footnote Economic Profit includes both explicit and implicit costs.

Question 49

What is the Production Function?

Answer 49

Relationship of inputs and outputs of the goods.

Question 50

Define Marginal Product.

Answer 50

Increase in output that arises from an additional unit of input.

Question 51

What does Diminishing Marginal Product refer to?

Answer 51

Input declines as the quantity of input increases.

Question 52

What is the formula for Total Cost?

Answer 52

Total Cost = Total FIXED Cost + Total Variable Cost.

Question 53

Define Fixed Cost.

Answer 53

Costs that do not vary with the quantity of output produced.

Question 54

Define Variable Cost.

Answer 54

Costs that do vary with the quantity of output produced.

Question 55

What is Average Cost (AC)?

Answer 55

Cost of each typical unit of product, determined by dividing total costs by quantity of output.

Question 56

What is Marginal Cost (MC)?

Answer 56

Increase in total costs that arises from producing an extra unit.

Question 57

What shape is the Average Total Cost (ATC) curve?

Answer 57

U-shaped.

Question 58

What is the Efficient Scale of the Firm?

Answer 58

The quantity that minimizes average total cost.

Question 59

What are the three important properties of cost curves?

Answer 59

* Marginal Cost eventually rises with the quantity of output * ATC curve is U-shaped * MC crosses ATC at the minimum or efficient scale of the firm.

Question 60

What is the effect of Economies of Scale?

Answer 60

Long-run ATC falls as the quantity of output increases.

Question 61

What is the effect of Diseconomies of Scale?

Answer 61

Long-run ATC rises as the quantity of output increases.

Question 62

What is Constant Return to Scale?

Answer 62

Long-run ATC stays the same as the quantity of output increases.