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Questions and Answers
What is the effect of a price increase on the quantity demanded of a product, assuming all else is equal?
What is the effect of a price increase on the quantity demanded of a product, assuming all else is equal?
- Quantity demanded will increase.
- Quantity demanded will remain the same.
- Quantity demanded will decrease. (correct)
- Quantity demanded will become unpredictable.
The substitution effect explains why consumers will always buy more of a cheaper product regardless of income changes.
The substitution effect explains why consumers will always buy more of a cheaper product regardless of income changes.
False (B)
What does 'ceteris paribus' mean in economic analysis?
What does 'ceteris paribus' mean in economic analysis?
All else being equal.
A good for which demand increases as income rises is called a __________ good.
A good for which demand increases as income rises is called a __________ good.
Match the demand-related terms with their definitions:
Match the demand-related terms with their definitions:
Which of the following variables does NOT affect market demand?
Which of the following variables does NOT affect market demand?
A shift in the demand curve indicates a change in the quantity demanded at every price.
A shift in the demand curve indicates a change in the quantity demanded at every price.
What happens to the demand for a normal good when consumer income decreases?
What happens to the demand for a normal good when consumer income decreases?
The __________ effect describes how a change in price impacts consumer purchasing power.
The __________ effect describes how a change in price impacts consumer purchasing power.
What is market equilibrium?
What is market equilibrium?
What is an inferior good?
What is an inferior good?
Substitutes are goods that can be used together.
Substitutes are goods that can be used together.
What effect does an increase in population generally have on the demand for goods and services?
What effect does an increase in population generally have on the demand for goods and services?
A _______ cost is a cost that has already been paid and cannot be recovered.
A _______ cost is a cost that has already been paid and cannot be recovered.
Match the following concepts with their definitions:
Match the following concepts with their definitions:
Which of these factors does NOT shift the supply curve?
Which of these factors does NOT shift the supply curve?
An increase in the price of a product will lead to a decrease in the quantity supplied according to the law of supply.
An increase in the price of a product will lead to a decrease in the quantity supplied according to the law of supply.
What happens to market equilibrium when supply increases?
What happens to market equilibrium when supply increases?
Consumers are often __________ about their future behavior, leading to poor decision-making.
Consumers are often __________ about their future behavior, leading to poor decision-making.
Which of these statements best describes complements?
Which of these statements best describes complements?
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Study Notes
Demand and Supply Curves
- Movement vs. Shift: Movement along curves occurs with price changes, while shifts indicate changes in demand/supply for reasons other than price.
- Law of Demand: As price decreases, quantity demanded increases; as price increases, quantity demanded decreases, assuming ceteris paribus (all else constant).
Demand
- Quantity Demanded: Amount consumers are willing to buy at a specific price.
- Demand Schedule: A table correlating product price to quantity demanded.
- Demand Curve: Graphical representation of price vs. quantity demanded.
Factors Shifting Demand
- Income:
- Normal goods: Demand increases with income.
- Inferior goods: Demand increases as income falls.
- Prices of Related Goods:
- Substitutes: Alternative goods that can replace one another.
- Complements: Products used together increase demand for each other.
- Tastes and Preferences: Influenced by trends, seasons, and individual consumer preferences.
- Population and Demographics: Demand typically rises with population growth. Changes in demographics impact specific market needs.
- Expected Future Prices: Anticipation of price changes can prompt increased present purchases if prices are expected to rise.
Supply
- Quantity Supplied: Amount that firms are willing to supply at a specific price.
- Supply Schedule: Table showing the relationship between price and quantity supplied.
- Supply Curve: Graphical depiction of price versus quantity supplied.
Factors Shifting Supply
- Prices of Inputs: Costs related to production inputs influence supply.
- Technological Change: Advances can increase supply efficiency.
- Prices of Substitutes in Production: Changes can divert resources to more profitable goods.
- Number of Firms: More firms generally increase total market supply.
- Expected Future Prices: Anticipating changes can alter present supply strategies.
Market Equilibrium
- Equilibrium occurs where quantity demanded equals quantity supplied.
- Surpluses: Occur when supply exceeds demand, leading to downward pressure on prices.
- Shortages: Occur when demand exceeds supply, leading to upward pressure on prices.
- Supply Increase Impact: Leads to lower market prices and higher equilibrium quantity.
- Demand Increase Impact: Results in higher market prices and increased equilibrium quantity.
Behavioral Economics
- Focuses on choices that defy rational economic behavior.
- Common consumer mistakes include not accounting for non-monetary opportunity costs and being overly optimistic about future actions.
Opportunity Costs
- Opportunity Cost: The cost of the next best alternative forgone when a decision is made.
- Endowment Effect: Consumers’ reluctance to sell owned items even when presented a higher selling price than their buying price.
Production Possibility Frontier (PPF)
- Visual tool to demonstrate resource efficiency and the trade-offs in production.
- Points inside the curve indicate inefficiency, while points on the curve represent efficient resource usage.
- Scarcity: Limited resources must meet unlimited wants.
- Absolute Advantage vs. Comparative Advantage: Absolute focuses on productivity measures; comparative based on lower opportunity costs.
Currency Impact on Production
- A weaker currency generally enhances production competitiveness, while a stronger currency can reduce production efficiency.
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