Module 12.2: Supply and Demand

Question 1

What is the substitution effect?

Answer 1

When the price of x decreases, consumptions shifts towards it.

Question 2

What is the income effect?

Answer 2

Total price of x decreases, person selling receives less income. can either lead to an increase or decrease consumption of good x.

Question 3

What are the three possible outcomes of a decrease in the price of good x?

Answer 3

1) sub effect is positive, and the income effect is positive too, consumption of good x will increase
2) sub effect is positive, and the income effect is negative, but smaller than sub effect - consumption of good x will increase
3) the sub effect is positive, and the income effect is negative and larger than sub effect - consumption of good x will decrease.

Question 4

What is a Giffen good?

Answer 4

an inferior good for which the negative income effect outweighs the positive substitution effect when price falls. Theoretically an upwards sloping demand curve.

Question 5

What is a Veblen good?

Answer 5

Higher the price makes the good more desirable. I.e luxury products.

Question 6

What are the factors of production?

Answer 6

1) Land
2) Labor
3) Capital
4) Materials

Question 7

what is the production function?

Answer 7

the quantity of output a firm can produce can be thought of as a function of the amounts of capital and labor employed.

Question 8

what is diminishing marginal returns?

Answer 8

when incremental labor reduces the output

Question 9

what is the short run? long run?

Answer 9

the time period over which some factors of production are fixed (capital).

all factors of production are variable in the long run.

Question 10

in the short run, if the items are being sold for more than their variable cost, should the store stay in business?

Answer 10

Yes

Question 11

In the long run, if the price is less than average totlal cost, should the firm shut down?

Answer 11

Yes

Question 12

Under perfect competition, how are price, marginal revenue, and average revenue related?

Answer 12

All the same

Question 13

When should a firm under imperfect competition shut down in the long run? short run? what is the breakeven point?

Answer 13

1) Shut down in long run but continue to operate short run = TC > TR > TVC
2) Shut down in both long run and short run = TR < TVC
3) Breakeven = TR = TC

Question 14

What are economies of scale?

Answer 14

result from factors such as labor specialization, mass productio n, and investment in more efficient equipment and technology.

Question 15

What are diseconomies of scale?

Answer 15

May result from increasing bureaucracy, problems with motivating a larger workforce, and greater barriers to innovation.