Micro Unit 2

Question 1

Law of Demand

Answer 1

As price goes up, quantity demanded goes down; inverse relationship between price and quantity.

Question 2

Law of Supply

Answer 2

As price goes up, quantity supplied goes up; direct relationship between price and quantity.

Question 3

What is the difference between change in quantity demanded and change in demand?

Answer 3

The only thing that can result in a change in quantity demanded is price, whereas a change in demand refers to the five shifters of demand.

Question 4

5 shifters of demand

Answer 4

1. Tastes and preferences
2. Change in prices of related goods
3. Change in income (disposable income)
4. Future expectations
5. Changes in population

Question 5

5 shifters of supply

Answer 5

1. Price and quantity of resources
2. # of sellers
3. technology
4. actions of the government
5. expectations of future profits

Question 6

Relationship between price and demand for substitute goods

Answer 6

Direct relationship

ex. if the price of coke goes up, the demand for pepsi will go up because people will buy the cheaper good.

Question 7

Relationship between price and demand for compliment goods

Answer 7

Inverse relationship

ex. If the price of hot dogs increases, the demand for hot dog buns will decrease.

Question 8

Relationship between income and demand for normal goods

Answer 8

Direct relationship

ex. as peoples incomes increase, the demand for name brand products like Dr. Pepper will increase.

Question 9

Relationship between income and demand for inferior goods

Answer 9

Inverse relationship

ex. As incomes decrease, the demand for inferior goods like dr. thunder will increase.

Question 10

Price ceiling

Answer 10

A maximum amount that a seller is allowed to charge for a given product. In order to have an effect, the price ceiling must be placed below the equilibrium price.

Question 11

Price floor

Answer 11

the minimum amount sellers can charge for a product. Binding price floors go above equilibrium and result in a surplus.

Question 12

Elasticity

Answer 12

shows how sensitive a quantity is to a change in price

Question 13

Inelastic Demand

Answer 13

Quantity demanded is insensitive to a change in price.

Characteristics include:
- few substitutes
- necessities
- elasticity coefficient is less than one
- Demand curve is STEEPER than normal

Question 14

Elastic Demand

Answer 14

Quantity demanded is sensitive to a change in price.

Characteristics include:
- many substitutes
- luxuries
- elasticity coefficient greater than one
- demand curve is FLATTER than normal

Question 15

Total revenue test

Answer 15

For inelastic demand, there is a direct relationship between price and total revenue.

For elastic demand, there is an indirect relationship between price and total revenue.

Question 16

Elasticity coefficient

Answer 16

% change in quantity/% change in price

Question 17

Cross price elasticity of demand

Answer 17

shows how sensitive a product is to a change in price of another good; can be used to determine whether two goods are substitutes or compliments.

change in Q of “a”/change in P of “b”

positive coefficient=substitute
negative coefficient=compliment

Question 18

Income elasticity of demand

Answer 18

shows sensitivity of quantity demanded to a change in income; can be used to determine whether a good is normal or inferior.

change in quantity/change in income

positive coefficient=normal
negative coefficient=inferior

Question 19

Consumer surplus

Answer 19

the difference between what you’re willing to pay and what you actually paid.

Question 20

Producer surplus

Answer 20

difference between what the seller received and what they were willing to sell for.

Question 21

Deadweight loss (DWL)

Answer 21

the lost consumer and producer surplus that is created when a market becomes inefficient.

Question 22

Excise Tax Burden

Answer 22

When the demand for a product is elastic, producers bear a majority of the tax burden.

When the demand for a product is inelastic, consumers bear a majority of the tax burden.

When the demand for a product is unit elastic, the tax burden is equally shared between consumers and producers.

Question 23

Price elasticity of supply

Answer 23

shows how sensitive producers are to a change in price; based on time limitations because producers need time to produce more products.

Question 24

Inelastic supply

Answer 24

When the supply of a product is insensitive to a change in price; steep curve

most goods are inelastic in the short run

Question 25

Elastic supply

Answer 25

When the supply of a product is insensitive to a change in price; flatter curve

Most goods have elastic supply in the long run

Question 26

utility maximization rule

Answer 26

Consumers should spend their money in a way that the marginal utility per dollar of goods equals each other.

MU/P