unit 2

Question 1

what is a competitive market

Answer 1

there are many buyers and sellers of the same good/service but none can influence the price at which it is sold

Question 2

supply/demand model

Answer 2

model of how a competitive market works

Question 3

what is the law of demand

Answer 3

the higher the price for a good/service, the smaller the quantity demanded is for that good

Question 4

what is a change in demand

Answer 4

shift of the demand curve, which changes the quantity demanded at any given price

Question 5

what is the difference between quantity demanded and demand

Answer 5

demand refers to the entire curve (non price factor will change this), quantity demanded is a specific point on the curve (quantity associated w specific price)

Question 6

what are 5 factors that will shift the demand curve

Answer 6

1. change in taste
2. change in price of related goods/services
3. change in income
4. change in number of consumers
5. change in expectations

Question 7

what are substitutes

Answer 7

when the rise in price of one good results to an increase of demand for another good

Question 8

what are complements

Answer 8

rise in price of one good leads to the decrease in the demand for another good

Question 9

what is a normal good

Answer 9

when a rise in income increases the demand for a good

Question 10

what is an inferior good

Answer 10

rise in income means a decrease in demand

Question 11

what is the law of supply

Answer 11

the price and quantity supplied of a good are positively related

Question 12

what is quantity supplied

Answer 12

actual amount of a good or service people are willing to sell at a certain point

Question 13

what are the 5 factors that will shift the supply curve

Answer 13

1. input prices
2. price of related goods/services
3. producer expectations
4. number of producers
5. technology

Question 14

what is an input

Answer 14

good or service that is used to produce another good or service

Question 15

what is a surplus

Answer 15

when the quantity supplied is greater then the quantity demanded (when the price is above equilibrium)

Question 16

what is a shortage

Answer 16

when the quantity demanded is greater then the quantity supplied (price is below equilibrium)

Question 17

what are price controls

Answer 17

legal restrictions on how high or low a market price may go

Question 18

price ceiling

Answer 18

max price sellers are allowed to charge for

Question 19

price floor

Answer 19

minimum rice buyers are required to pay for a good or service

Question 20

binding price ceiling

Answer 20

will cause a shortage
inefficiency in the form of wasted resources and low quality

Question 21

binding price floor

Answer 21

will cause a surplus
inefficiency in the form of allocation of sales among sellers and low quantity

Question 22

what is a black market

Answer 22

which goods or services are bought and sold illegally

Question 23

what is a quota

Answer 23

an upper limit on the quantity of some good that can be bought or sold

Question 24

what is a license

Answer 24

gives its owner the right to supply a good or service

Question 25

what is a wedge

Answer 25

the price paid by buyers is higher then what is received by sellers

Question 26

what is the quota rent

Answer 26

difference between demand and supply price at quota amount (earnings that is given to the license holder from ownership of the right to sell the good)

Question 27

what is deadweight loss

Answer 27

the value of forgone mutually beneficial transactions

Question 28

what is the substitution effect

Answer 28

the change in price of a good is the change in quantity demanded of another good (consumer substitutes the good that has become relatively cheaper for the good that is relatively more expensive)

Question 29

what is the income effect

Answer 29

change in price of a good is the change in quantity demanded that results from a change in the consumers purchasing power when the price of a good changes

Question 30

what is price elasticity of demand

Answer 30

the ratio of % change in quantity demanded to % change in price

Question 31

what is the midpoint method

Answer 31

(change in quantity/average)/(change in price/average)

Question 32

when is demand perfectly inelastic

Answer 32

quantity demanded doesn't respond to any change in price

Question 33

when is demand perfectly elastic

Answer 33

any price increase will cause the quantity demanded to drop to zero

Question 34

what happens if price elasticity of demand is greater then 1

Answer 34

demand is elastic

Question 35

what happens if price elasticity of demand is less then 1

Answer 35

demand is inelastic

Question 36

what happens if price elasticity of demand is exactly 1

Answer 36

unit-elastic

Question 37

what is total revenue

Answer 37

the total value of sales of a good or service -- price x quantity sold

Question 38

what is a price effect

Answer 38

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

Question 39

what is a quantity effect

Answer 39

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

Question 40

effect of elasticity on total revenue: unit elastic

Answer 40

fall in price has no effect on total revenue

Question 41

effect of elasticity on total revenue: inelastic

Answer 41

price effect dominates quantity effect -- fall in price reduces total revenue

Question 42

effect of elasticity on total revenue: elastic

Answer 42

quantity effect dominates price effect -- fall in price increases the total revenue

Question 43

what factors affect price elasticity of demand

Answer 43

1. availability of close substitutes 2. proportion of income 3. luxury vs necessity 4. addictive or habit 5. time

Question 44

what is the cross price elasticity of demand

Answer 44

measures the effect of the change in one goods price on the quantity demanded of another good

Question 45

how to calculate cross price elasticity of demand

Answer 45

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

Question 46

if two goods are substitutes, CPED is:

Answer 46

positive (a rise in price of one increases demand for other)

Question 47

if two goods are complements, CPED is:

Answer 47

negative (rise in price of one good decreases demand for other)

Question 48

what is the income elasticity of demand

Answer 48

% change in quantity of good demanded / % change in income

Question 49

if income elasticity is greater then 1, it is

Answer 49

income elastic

Question 50

if income elasticity is less then 1, it is

Answer 50

income inelastic

Question 51

what is the price elasticity of supply

Answer 51

% change in quantity supplied / % change in price

Question 52

if PES is zero

Answer 52

perfectly inelastic supply (change in price has no effect on quantity supplied)

Question 53

what factors affect PES

Answer 53

1. availability of inputs 2. time

Question 54

total consumer surplus

Answer 54

sum of all individual consumer surpluses

Question 55

what is a sellers cost

Answer 55

the lowest price someone is willing to sell the good

Question 56

what is total surplus

Answer 56

total net gain to consumers and producers from trading in a market (sum of CS and PS)

Question 57

regressive tax

Answer 57

rises less than in proportion to income (high income taxpayers pay a smaller amount of their income then low income taxpayers)

Question 58

proportional tax

Answer 58

all taxpayers pay the same percentage of their income

Question 59

progressive tax

Answer 59

high income taxpayers pay larger percentage of their income compared to low income taxpayers

Question 60

excise tax

Answer 60

tax on sales of a good or service

Question 61

tax incidence

Answer 61

distribution of tax burden

Question 62

lump sum tax

Answer 62

tax of a fixed amount payed by all taxpayers (eg: poll tax)

Question 63

administrative costs

Answer 63

are the resources used by the government to collect the tax

Question 64

protectionism

Answer 64

practice of limiting trade to protect domestic industries

Question 65

tarrifs

Answer 65

taxes on imports

Question 66

import quota

Answer 66

limit on the quantity of a good that can be imported within a given period