Economics Chapter 5: Market Efficiency & Elasticity

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Questions and Answers

What happens to the quantity demanded of gasoline when its price increases?

It fluctuates randomly.

It remains unchanged.

It decreases. (correct)

It increases significantly.

Which statement correctly defines inelastic demand?

Quantity demanded remains constant at all price points.

Quantity demanded changes slightly with price changes. (correct)

Quantity demanded is unaffected by price changes.

Quantity demanded changes substantially with price changes.

Which of the following best describes elasticity in economics?

A fixed amount of change in demand.

The maximum price consumers are willing to pay.

An unchanging quantity supplied regardless of price.

A measure of responsiveness to market changes. (correct)

What determines the price elasticity of demand?

The availability of substitutes and necessity of the good. Signup and view all the answers

What would likely happen if a new tax is imposed on gasoline?

Gasoline consumption would decrease. Signup and view all the answers

In economic terms, if the quantity demanded responds moderately to price changes, how is this demand described?

Unit elastic. Signup and view all the answers

How do economists typically calculate the price elasticity of demand?

By computing the percentage change in quantity demanded divided by the percentage change in price. Signup and view all the answers

What is likely to influence a consumer's response to changing gasoline prices?

Availability of alternative fuels. Signup and view all the answers

What factor contributes to a good having more elastic demand?

Availability of close substitutes Signup and view all the answers

Which of the following is more likely to have inelastic demand?

Basic groceries Signup and view all the answers

Which market definition is likely to exhibit more elastic demand?

Luxury sedans specifically Signup and view all the answers

How does time horizon affect the elasticity of demand for goods?

Over time, demand becomes more elastic Signup and view all the answers

What happens to the quantity demanded of butter if its price increases, assuming margarine's price is fixed?

It falls by a large amount Signup and view all the answers

Which of the following statements about luxury goods is true?

They tend to have elastic demand Signup and view all the answers

Which product would likely have an inelastic demand due to a lack of substitutes?

Cigarettes Signup and view all the answers

What is the primary reason that narrow market definitions tend to have more elastic demand?

More close substitutes are available Signup and view all the answers

What occurs when an allocation is not efficient in a market?

Some gains from trade are not realized. Signup and view all the answers

Which scenario illustrates an inefficient allocation in a market?

A good is produced by high-cost producers. Signup and view all the answers

What is the primary focus of a social planner in the discussion of market efficiency?

Maximizing total surplus. Signup and view all the answers

What do policymakers consider in addition to efficiency when evaluating the market?

Equity concerns. Signup and view all the answers

When a market achieves equilibrium, what determines buyer and seller participation?

The willingness to pay and the price. Signup and view all the answers

How does one evaluate if a market allocation is efficient?

By assessing consumer and producer surplus. Signup and view all the answers

What does the concept of market 'pie' refer to in economic terms?

The total gains from trade in the market. Signup and view all the answers

What does equity primarily concern in economic context?

The fairness in the distribution of well-being. Signup and view all the answers

What does it mean when the price elasticity of demand is reported as a positive number?

It reflects greater responsiveness of quantity demanded to price changes. Signup and view all the answers

If the price of an ice cream cone increases by 10% and the quantity demanded falls by 20%, what is the price elasticity of demand?

2 Signup and view all the answers

Why is the price elasticity of demand sometimes reported as negative?

To reflect the inverse relationship between price and quantity demanded. Signup and view all the answers

What problem arises when calculating the price elasticity of demand between two points on a demand curve?

The elasticity from point A to point B differs from that from point B to point A. Signup and view all the answers

When using the common practice of dropping the minus sign in price elasticity calculations, what does this signify?

The focus is solely on the size of the elasticity coefficient. Signup and view all the answers

What does a price elasticity of demand value greater than 1 indicate?

Demand is elastic. Signup and view all the answers

If a good has a price elasticity of demand of 0.5, what does this imply?

The good has inelastic demand. Signup and view all the answers

Which of the following does not accurately describe the relationship between price changes and quantity demanded?

Increasing price may lead to increased quantity demanded for luxury items. Signup and view all the answers

What happens to the demand curve if there is an increase in demand?

It shifts to the right. Signup and view all the answers

Which of the following scenarios would likely cause a decrease in demand for a product?

A decline in consumer preference for the product. Signup and view all the answers

If consumers learn that eating a certain food item has health benefits, what is likely to happen to the demand for that food item?

The demand curve will shift to the right. Signup and view all the answers

What is indicated by a leftward shift in the demand curve?

A decrease in quantity demanded at every price. Signup and view all the answers

In the context of demand curves, what does dynamism refer to?

Continuous shifts in the demand curve over time. Signup and view all the answers

Study Notes

Market Efficiency

An efficient allocation of resources maximizes the total surplus.
If an allocation is not efficient, some gains from trade are not being realized.
One example of inefficiency is when production is not at the lowest cost.
Equity, fairness in the distribution of well-being, is another important consideration for social planners.

Evaluating the Market

Figure 7.7 illustrates consumer and producer surplus in a market at equilibrium.
Equilibrium is when the price determines which buyers and sellers participate.

The Elasticity of Demand

Elasticity measures how much buyers and sellers respond to changes in market conditions.
Price elasticity of demand measures the response in quantity demanded to a change in price.

Elasticity of Demand: Determinants

Availability of substitutes: Goods with close substitutes tend to have a more elastic demand.
Necessities vs. luxuries: Necessities have an inelastic demand while luxuries have an elastic demand.
Market definition: Narrowly defined markets tend to have more elastic demand due to easier substitution.
Time horizon: Goods have more elastic demand over longer time horizons.

The Elasticity of Demand: Computation

Elasticity is calculated as the percentage change in quantity demanded divided by the percentage change in price.
A larger price elasticity implies greater responsiveness of quantity demanded to price changes.
The midpoint method helps to address the issue of the elasticity being different depending on the direction of the calculation (from A to B versus from B to A).

Shifts in the Demand Curve

An increase in demand shifts the demand curve to the right.
A decrease in demand shifts the demand curve to the left.
Factors affecting demand can influence shifts:
- Consumer income
- Price of related goods
- Tastes
- Population
- Expectations

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Description

This quiz covers key concepts from Economics Chapter 5, focusing on market efficiency, consumer and producer surplus, and the elasticity of demand. Topics include how resources are allocated and the determinants of demand elasticity. Test your understanding of how market conditions affect buyer and seller behavior.