week 3 (chapter 5 and 6)

Question 1

prices

Answer 1

signals that guide the allocation of resources, and how things are going to be priced
-leads to price gouging

Question 2

price gouging

Answer 2

taking advantage of consumers, charging different prices to different consumers

Question 3

elasticity

Answer 3

how much one variable responds to a change in another variable

Question 4

price elasticity of demand

Answer 4

how much the quantity demanded of a good responded to a change in price of that good

Question 5

elasticity of demand

Answer 5

percentage change in quantity demanded / percentage change in price

Question 6

elastic demand

Answer 6

quantity demanded responds substantially to change in price

Question 7

inelastic demand

Answer 7

quantity demanded responds slightly to change in price
ex. gas, oil, sanitary products

Question 8

what does the curve look like when the demand is elastic?

Answer 8

flatter

Question 9

what does the curve look like when the demand is inelastic?

Answer 9

steeper

Question 10

is the elasticity of demand always negative?

Answer 10

YES - but we use the absolute value for it

Question 11

magnitude of the change in price reaction

Answer 11

< 1 = inelastic
> 1= elastic
= 1 unit elastic
= 0 perfectly inelastic
= infinity perfectly elastic

Question 12

perfectly inelastic

Answer 12

= 0
customer sensitivity to price change is none
ex. food as a whole, clothes as a whole
things that you need
vertical

Question 13

inelastic demand

Answer 13

< 1
customer sensitivity is relatively low, demand curve is steep
ex. 22% increase in price leads to 22% decrease in quantity demanded

Question 14

unit elastic demand

Answer 14

= 1
customer sensitivity is intermediate
ex. a 22% increase in price leads to a 67% increase in quantity demanded

Question 15

elastic demand

Answer 15

> 1
customer sensitivity is relatively high, and demand curve is flatter
ex. 22% increase in price leasd to 67% decrease in quantity demanded

Question 16

perfectly elastic demand

Answer 16

= 0
customer sensitvity is extreme, and curve is horizontal
ex. at any price above a 4 dolalr quantity demanded is zero
no change in price, so the price stays fixed
ex. 1 dollar arizonas

Question 17

determinants of elasticity

Answer 17

1. availability of substitutes
2. time horizon
3. category of product
4. luxuries vs. necessities
5. purchase size

Question 18

how to find percentage change

Answer 18

use the midpoint method

(q2-q1)/(q2+q1)/((p2-p1)/(p2+p1)/2) x 100

then to find the elasticty of demand by finding percentage change at first…

percentage of quantity demanded/percentage of price change

Question 19

availability of substitutes

Answer 19

fewer substitues make it harder for consumers to adjust quantity when price changes
demand is more inelastic

Question 20

time horizon

Answer 20

less time to adjust to find substitutes or make alterations means that there is lower elasticity
elasticity will become larger as time goes on

Question 21

category of product

Answer 21

the less specific the classification, the fewer substitutes there are (making demand inelastic) and vice versa
ex. the elasticity of demand is higher for lettuce (very specific) than it is for food in general (broad)

Question 22

necessities vs. luxuries

Answer 22

for necessities, we do not change quantity much as the price changes
for luxuries, we are more sensitive to price changes

Question 23

purchase size

Answer 23

we are less sensitive to price changes when the good feels cheap - lower price sensitivity

we are equally more sensitive to price changes when the good feels expensive - higher price elasticity

Question 24

linear demand elasticity

Answer 24

along the curve, the elasticity is different because prices are lower at one end than at the other

Question 25

how to calculate revenue

Answer 25

price x quantity elasticity of demand affects revenue when good price changes - if elasticity of quantity demanded is larger than the price, there is going to be a drop in revenue - if elasticity of quantity demanded is smaller than the price, there is going to be a rise in revenue

Question 26

price elasticity of supply

Answer 26

how much the quantity supplied of a good responds to a change in price of that good - directly proportional relationship between quantity supplied and price

Question 27

elastic supply

Answer 27

when quantity supplied responds slightly to change in price

Question 28

inelastic supply

Answer 28

when quantity supplied responds slightly to change in price

Question 29

determinants of elasticity

Answer 29

1. change in per unit costs (input prices) with increased production 2. time horizon 3. share of market for inputs 4. geographic scope

Question 30

change in per unit costs

Answer 30

if production costs more, there is going to be less sensitivity to changes in prices and vice versa

Question 31

time horizon

Answer 31

immediately following a price increase, producers can only expand output using their current capacity (making supply inelastic) over time producers can expand their capacity (making supply elastic) when prices change in the supply, it will be harder to find another supplier in the short term, but easier in the long run more sensitivity to price in the short run, but less in the long run

Question 32

share of market for inputs

Answer 32

supply is elastic when the industry can be expanded without causing a big increase in the demand (and price) for the industry's inputs) supply inelastic when industry expansion causes a significant increase the demand/price for inputs if there is a large market share of a good or industry, there is going to be way more sensitivity when there are changes in the price more people in industry = less sensitivity to changes in price less people in the industry = more sensitivity to changes in price

Question 33

geographic scope

Answer 33

the wider the scope of the market, the less elastic the supply if you are focusing on one particular region any small change will drastically affect how much you are producing

Question 34

input prices

Answer 34

any sort of labor costs, manufacturing costs, paying workers, etc.

Question 35

income elasticity of demand

Answer 35

percent change in quantity demanded/percentage change in income for normal goods, income elasticity > 0 - when income goes up we expect the demand to go up for inferior goods, income elasticity < 0 - when income goes up, we expect the demand for that good to go down

Question 36

cross price elasticity

Answer 36

measures the response of the demand of one good change according to the price of another good percentage change in quantity demand for good 1/ percentage change in price of good 2 substitutes = positive for demand and positive for price complements = positive for demand and negative for price

Question 37

price ceiling

Answer 37

legal maximum on the price of a good or service - used to maintain the purchasing power of consumers - legal cap on prices

Question 38

what happens when the price ceiling is below the equilibrium price?

Answer 38

there is a binding constraint and causes a shortage of the supply because so many people want the good

Question 39

effects of price ceilings below equilibrium prices

Answer 39

1. shortages 2. reduction in product quality 3. wasteful lines and other costs of search 4. loss of gains from trade 5. misallocation of resources

Question 40

misallocation of resources

Answer 40

prices controls distort signals and eliminate incentives leading to a misallocation of resources the people who need it the most might not be able to get it, because of the surplus of the less expensive goods

Question 41

loss of gains from trade

Answer 41

price ceilings set below the market price cause quantity supplied to be less than the market quantity price ceilings create deadweight loss by forcing quantity supplied below market quantity buyers and sellers would both benefit from trade at a higher price but cant

Question 42

deadweight

Answer 42

the total of lost consumer and producer surplus when all mutually profitable gains from trade are not exploited

Question 43

wasteful lines and costs of search

Answer 43

if prices are not allowed to rise, buyers must compete with each other in other ways ex. bribes, using bots to buy things

Question 44

reduction in product quality

Answer 44

when prices are controlled they cant profit off of supplying more expensive product producers cut corners to find a cheaper solution, to where they can make a profit off of the ceiling

Question 45

price floor

Answer 45

a legal minimum on the price of a good or service (e.g. minimum wage)

Question 46

is a price floor below the equilibrium price binding?

Answer 46

NO - has no effect on the market outcome

Question 47

four effects of price floors

Answer 47

1. surpluses of goods 2. loss of gains from trade 3. wasteful increases in quality 4. misallocation of resources

Question 48

price floor causing wasteful increases in quality

Answer 48

higher quality raises cost and reduces seller proft buyers get a higher quality but would prefer lower price price floor encourages sellers to waste resources; higher quality than buyers are willing to pay for

Question 49

price floors affecting the misallocation of resources

Answer 49

1. allows high cost firms to operate 2. prevents low cost firms from entering the industry ex. regulation prevented southwest from entering the national market