week 2

Question 1

what are comparative statics

Answer 1

the comparison of two different economic outcomes before and after a change in some underlying exogenous parameter

Question 2

what is a change in quantity demanded

Answer 2

refers to a movement along a given demand curve

Question 3

what is a change in demand

Answer 3

refers to an entirely new demand curve

Question 4

what factors shift demand

Answer 4

change in price of related goods
change in income
change in preferences
change in population
change in expectation of future prices

Question 5

what are complementary goods

Answer 5

goods that are consumed together
if the price of a complementary good decreases then demand increases

Question 6

what are substitute goods

Answer 6

goods that are consumed in place of one another
if the price of a substitute good increases, then demand increases

Question 7

what is a normal good

Answer 7

an increase in income leads to an increase in demand

Question 8

what is an inferior good

Answer 8

an increase in income leads to a decrease in demand

Question 9

how do changes in preferences shift demand

Answer 9

when it became clear that smoking had severe negative health consequences, lead to a decrease in demand

Question 10

how do changes in population shift demand

Answer 10

more buyers lead to increase in demand

Question 11

how do changes in expectation of future prices shift demand

Answer 11

if prices will increase soon, may purchase a good now

Question 12

how does increase in demand shift the curve

Answer 12

an increase in demand leads to an increase in equilibrium price and quantity

Question 13

how does decrease in demand shift the curve

Answer 13

a decrease in demand leads to a decrease in equilibrium price and quantity

Question 14

how does decrease in demand shift the curve

Answer 14

a decrease in demand leads to a decrease in equilibrium price and quantity

Question 15

what factors shift supply

Answer 15

weather
change in expectations
change in number of sellers

Question 16

how does decrease in supply effect the supply curve

Answer 16

a decrease in supply will lead to an increase in equilibrium price and a decrease in equilibrium quantity

Question 17

how does increase in supply effect the supply curve

Answer 17

an increase in supply will lead to a decrease in equilibrium price and an increase in equilibrium quantity

Question 18

what is price elasticity of demand

Answer 18

denoted by ε
measure of responsiveness of quantity demanded to changes in price

Question 19

how do you calculate ε

Answer 19

percentage change in quantity demanded / percentage change in price
ΔQ / ΔP x P/Q

Question 20

what do the results of ε mean

Answer 20

ε > 1 - demand is elastic and consumers are fairly responsive to price change
ε < 1 - demand is inelastic and consumers are fairly unresponsive to price change
ε = 1 - demand is unit elastic

Question 21

what is perfectly elastic demand

Answer 21

even the slightest price increase leads consumers to switch to substitutes

Question 22

what is perfectly inelastic demand

Answer 22

consumers cannot switch to substitutes or stop buying when price increases

Question 23

what is perfectly inelastic demand

Answer 23

consumers cannot switch to substitutes or stop buying when price increases

Question 24

what are the determinants of ε

Answer 24

availability of close substitutes

Question 25

what is arc elasticity

Answer 25

price elasticity of demand between two points on the demand curve

Question 26

what is price point elasticity

Answer 26

a measure of the elasticity of demand at a particular point on the demand curve

Question 27

what is ε at point A on the demand curve

Answer 27

εA = ΔQ/ΔP x P/Q = 1/slope x P/Q

Question 28

how do you compare price elasticity for two demand curves that intercept

Answer 28

if price and quantity are the same, price elasticity is always greater for the less steep of the two demand curves

Question 29

how is revenue effected if demand is elastic

Answer 29

a small increase in price will decrease quantity demanded by a relatively large amount

Question 30

how is revenue affected if demand is inelastic

Answer 30

a large increase in price will decrease quantity demanded by a relatively small amount
an increase in price increases total revenue