Class 2: Markets

Questions and Answers

What does the ceteris paribus assumption allow us to analyze?

Government intervention in markets

The effect of multiple changes at once

The impact of one variable while keeping others constant (correct)

Long-term economic trends

What happens to the demand for apples if household incomes rise?

Demand goes up (correct)

Demand goes down

Demand remains unchanged

Demand fluctuates unpredictably

What effect does a rise in the price of pears have on the demand for apples?

Demand for pears goes up

Demand for apples remains the same

Demand for apples goes up (correct)

Demand for apples goes down

What signifies a shift in the demand curve?

A change in consumer preference Signup and view all the answers

Which of the following is NOT a factor affecting market supply?

Consumer preferences Signup and view all the answers

Which factor can a manager directly influence in a market supply context?

The production technology used Signup and view all the answers

What does the term 'elasticity of supply' refer to?

The responsiveness of supply to price changes Signup and view all the answers

If the price of apples falls, what is the expected movement along the demand curve?

Movement to the right Signup and view all the answers

What happens to demand when the price of a haircut increases by £1?

Demand decreases by 3 units. Signup and view all the answers

What is the equation representing the demand for haircuts at £30?

D = 50 - 3(P - 30) Signup and view all the answers

What does the own-price elasticity of demand measure?

How demand responds to changes in the price of a good. Signup and view all the answers

If the supply of haircuts at £30 is 40 per week, what will the supply be at £32?

44 haircuts per week. Signup and view all the answers

Given the demand curve D = 140 - 3P, what does the coefficient -3 indicate?

A 1 unit increase in price results in a 3 unit decrease in quantity demanded. Signup and view all the answers

What is the market equilibrium price of a haircut in Central London?

£30 Signup and view all the answers

What is the interpretation of an elasticity value greater than 1?

The demand is elastic. Signup and view all the answers

When excess supply occurs in the market for haircuts, what happens to prices?

Prices tend to fall. Signup and view all the answers

At the equilibrium where D* = 44 and P* = 32, what is the own-price elasticity of demand?

-2.18 Signup and view all the answers

At an equilibrium price of £30, how many haircuts will be performed each week?

50 haircuts. Signup and view all the answers

How does the own-price elasticity change based on the point on the demand curve?

It is influenced by the slope and position on the curve. Signup and view all the answers

How do you begin solving for the equilibrium price in a simultaneous equation problem?

Set supply equal to demand. Signup and view all the answers

Which of the following best describes the relationship between price and quantity supplied?

As price increases, quantity supplied increases. Signup and view all the answers

What happens to the supply of wheat if wage costs fall?

Supply increases Signup and view all the answers

Which factor will shift the supply curve for wheat to the right?

Technological progress that increases crop yields Signup and view all the answers

What does the term 'equilibrium' refer to in a market context?

A stable price level where supply equals demand Signup and view all the answers

What effect does an increase in the price of the good itself have on the supply curve?

Movement along the supply curve occurs Signup and view all the answers

What is the likely outcome if the price exceeds the equilibrium price?

Excess supply will occur Signup and view all the answers

If something other than the good's own price changes, what does this imply for the supply curve?

The entire supply curve shifts Signup and view all the answers

Which of the following scenarios illustrates the ceteris paribus assumption in supply analysis?

Examining supply changes without altering consumer preferences Signup and view all the answers

If the market environment changes, what is expected to happen to the equilibrium?

It adjusts to a new equilibrium Signup and view all the answers

What is the equilibrium price found in the numerical example?

£32 Signup and view all the answers

At the equilibrium quantity, how many haircuts are provided per week in the example?

44 haircuts Signup and view all the answers

If the demand curve shifts due to an external factor, what is the likely impact on price and quantity?

Price increases, quantity increases Signup and view all the answers

What does own-price elasticity of demand measure?

The responsiveness of quantity demanded to price changes Signup and view all the answers

When the supply curve shifts, how does it affect the equilibrium?

Move along the demand curve, with price and quantity changing in opposite directions Signup and view all the answers

What happens when both supply and demand experiences changes simultaneously?

Both price and quantity are affected, but direction is ambiguous Signup and view all the answers

What characterizes the concept of elasticity in economics?

It provides a scale-free measure of responsiveness Signup and view all the answers

Which equation correctly represents the equilibrium condition?

140 - 3P = 2P - 20 Signup and view all the answers

Which of the following types of elasticity does not measure price effects?

Income elasticity of demand Signup and view all the answers

If demand shifts to the right while supply remains unchanged, what will occur?

Equilibrium price and quantity will both rise Signup and view all the answers

Study Notes

Demand Influencing Factors

Ceteris paribus assumption allows analysis of one factor's change while holding others constant.
Price decrease of apples leads to increased demand.
Rise in household incomes increases demand for apples.
Increase in price of substitute goods, like pears, increases demand for apples.
Health concerns about apples decrease their demand.

Demand Curve Dynamics

Demand curve shifts left or right due to changes in factors other than the good's own price.
Movement along the curve indicates how demand reacts to changes in the good's own price.
Economists denote changed variables or functions with a prime symbol (e.g., DꞋ(p)).

Market Supply Overview

Supply reflects the quantity of goods producers are willing to sell over a specified period.
Understanding supply is crucial for managers and entrepreneurs.
Key topics to explore further include the supply curve and elasticity of supply.

Factors Affecting Supply

Primary factors influencing supply include product pricing, production costs, and market firm numbers.
Changes in these factors directly impact supply levels.

Supply Influencing Factors

Ceteris paribus allows examination of one supply factor at a time.
Higher wheat prices lead to increased wheat supply.
Decreased wage costs boost wheat supply.
Technological advancements increasing crop yields also raise wheat supply.

Supply Curve Insights

Movement along the supply curve reflects how firms adjust to changes in the good's own price.
The entire supply curve shifts with changes unrelated to the product's price.

Market Equilibrium Explained

Equilibrium represents a stable state with no impetus for change among market participants.
At equilibrium, buyers and sellers operate optimally within their available information.

Equilibrium Price Implications

At equilibrium price, all consumers seeking to purchase can find sellers.
Price alterations—higher or lower than equilibrium—generate excess supply or demand.

Excess Supply and Excess Demand

Excess supply occurs when quantity supplied exceeds quantity demanded at a given price.
Conversely, excess demand arises when quantity demanded surpasses quantity supplied.

Numerical Example: Haircuts Market

Given data: £30 price yields 50 haircuts per week; each £1 increase reduces demand by 3.
Demand expressed as: D = 50 - 3(P - 30).

Supply Side Dynamics for Haircuts

Data: £30 price corresponds to a supply of 40 haircuts; each £1 rise boosts supply by 2.
Supply expressed as: S = 40 + 2(P - 30).

Steps to Find Equilibrium

Simplify expressions for demand and supply.
Set supply equal to demand and solve for price (P).
Check the outcome by inserting price back into either supply or demand function.

Market Responses to Demand Shifts

Demand shifts yield price and quantity changes in the same direction, moving along the supply curve.

Market Responses to Supply Shifts

Supply shifts yield price and quantity changes in opposite directions, leading to movement along the demand curve.

Elasticity Concepts

Elasticity offers a unit-independent measure of response in supply and demand.
Focus areas include own-price elasticity of demand, cross-price elasticity, income elasticity, and price elasticity of supply.

Own-Price Elasticity of Demand

Measures demand reaction relative to price changes, providing firms insight into price-responsive behavior.
Formula: % change in quantity demanded / % change in price.

Calculating Own-Price Elasticity

For given demand curve D = 140 - 3P and equilibrium values D* = 44, P* = 32, calculate elasticity at equilibrium.
Elasticity calculated as elasticity = -3(32/44) ≈ -2.18.

Classes of Demand Elasticity

Demand classified as elastic if elasticity > 1, indicating significant response to price changes.

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Description

This quiz explores the factors that influence demand in economics, focusing on the ceteris paribus assumption. You'll analyze scenarios involving price changes and income shifts, specifically in relation to apples and pears. Test your understanding of how these elements affect consumer behavior.