Untitled Quiz

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Questions and Answers

What effect does a deep freeze have on the orange crop supply?

It increases the supply of oranges.

It makes oranges more desirable.

It has no effect on the supply of oranges.

It decreases the supply of oranges. (correct)

Which factor does NOT influence demand elasticity?

Availability of substitutes.

Producer expectations. (correct)

Necessities versus luxuries.

Time needed to adjust to price change.

Which statement best describes inelastic demand?

Only luxury goods exhibit inelastic demand.

Consumers completely stop buying when prices rise.

Demand significantly changes with price variations.

Demand remains stable despite price changes. (correct)

What is the likely outcome if a producer expects rising grain prices?

They will store their grain. Signup and view all the answers

What indicates that supply is elastic?

A small change in prices results in a large change in quantity supplied. Signup and view all the answers

Which of the following typically reflects a luxury good?

Jewelry. Signup and view all the answers

What is the result when the elasticity of demand is greater than 1?

Demand is elastic. Signup and view all the answers

Which scenario would likely shift the supply curve to the left?

A natural disaster destroys production facilities. Signup and view all the answers

What does the law of demand state about the relationship between price and quantity demanded?

Price and quantity demanded move in opposite directions. Signup and view all the answers

Which factor is NOT considered a demand shifter?

Increased production costs Signup and view all the answers

Which of the following explains the law of diminishing marginal utility?

Satisfaction decreases as more units of the same good are consumed. Signup and view all the answers

How does the income effect influence purchasing behavior?

Higher prices allow consumers to buy less of a product. Signup and view all the answers

What happens when there is an increase in consumer income?

Demand for normal goods usually increases. Signup and view all the answers

In what situation would the substitution effect commonly occur?

When the price of a good rises and consumers turn to alternatives. Signup and view all the answers

What does the law of supply state?

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

Which of the following factors would typically lead to a shift in the supply curve?

A decrease in the price of input materials. Signup and view all the answers

Study Notes

Demand

The quantity of a good or service that people are willing and able to buy at various prices
Always expressed in a time frame, such as per day, per week, or per year
Law of Demand: Price and quantity demanded move in opposite directions (as price increases, demand decreases)

Demand Schedule

Lists the quantities of a good that a person or group of people will buy at various prices

Market Demand

The sum of all individual quantities demanded in a market
Economists use the term market demand when referring to demand
Businesses explore this by fluctuating prices or conducting surveys

Reasons for Inverse Relationship (Law of Demand)

Diminishing Marginal Utility: The more we have of something, the less satisfaction we get from additional units. As a result, people are less likely to buy large quantities unless the price is low.
Income Effect: If prices rise, people cannot afford to buy as much as they did before.
Substitution Effect: If a different good can satisfy the same want, consumers will buy the cheaper option.

Demand Shifters

Changes in consumer income: More money means more opportunity to buy.
Changes in the number of consumers: For example, in resort towns, demand is higher in the summer than in the winter.
Changes in consumer tastes and preferences: Social media and advertising influence consumer preferences - sushi is a good example, as its popularity has increased significantly in recent years.
Changes in consumer expectations: For example, people may be less likely to buy certain items before Black Friday, anticipating sales.
Changes in the price of substitute goods: For example, if the price of chicken rises, people might switch to buying more beef.
Changes in the price of complementary goods: For example, the price of tennis rackets and tennis balls might be sold together.

Supply

The quantity of goods or services that producers are willing and able to sell at various prices.
Producers aim to maximize profits.
Supply is always expressed in a time period, such as weeks, months, or a year.

Law of Supply

As price increases, quantity supplied increases.
As price decreases, quantity supplied decreases.

Supply Shifters

Cost of inputs: If the price of an input (such as seed corn) increases, producers may plant less, since profit is crucial.
Changes in the number of producers: For example, since the iPad was first released, numerous new varieties of tablets have entered the market.
Conditions due to natural disasters or international events: For example, a deep freeze could affect the orange crop, or a wet spring may prevent farmers from planting crops. War in Saudi Arabia could cause a decrease in oil supply.
Changes in technology: Robots can make labor cheaper, leading to an increase in supply.
Changes in producer expectations: For example, farmers may decide to sell their grain or put it into storage.
Changes in government policy: Examples include:
- Subsidies: Cash payments offered to producers to help them continue operating (often given to farmers)
- Excise taxes: Taxes imposed on goods, like oil

Demand Elasticity

A way to measure consumers' sensitivity to price changes.

Inelastic Demand

Consumers are not very responsive to price changes.
For example, even if the price of toothpaste increases, people will likely continue to buy it.

Elastic Demand

Consumers are very responsive to price changes.

Calculating Demand Elasticity

Demand Elasticity = % change in quantity demanded / % change in price
If the result is greater than 1, demand is elastic.
If the result is less than 1, demand is inelastic.

Factors that influence Elasticity of Demand

Availability of substitutes: Products with close substitutes tend to have elastic demand, as consumers can switch.
Price relative to income: We notice changes in price for big-ticket items.
Necessities vs. luxuries:
- Necessities tend to have inelastic demand (we still need to buy food).
- Luxuries tend to have elastic demand (we don't need to buy jewelry).
Time needed to adjust to a price change: People need time to adjust to major price changes, such as gas price increases.

Elasticity of Supply

Measures how sensitive producers are to price changes.
Tells economists how much a producer will change the quantity supplied in response to a change in price.

Calculating Supply Elasticity

Supply elasticity = % change in quantity supplied / % change in price.
If the result is greater than 1, supply is elastic.
If the result is less than 1, supply is inelastic.

Supply and Demand

The two most important forces in a market economy.
Consumers are always looking for bargains and will buy more when prices are low.
Producers are willing to supply more when prices are high.