Economics Chapter on Causation and Demand

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Questions and Answers

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

Increase in demand (correct)

Decrease in demand

No change in demand

Reduction in price

What type of data compares variables at one point in time?

Situational data

Time-series data

Historical data

Cross-sectional data (correct)

How is the value of an index number calculated?

Absolute value in current period divided by absolute value in previous period times 100

Absolute value in given period divided by absolute value in base period times 100 (correct)

Current sales value increased by base period value

Absolute value in base period multiplied by current value times 100

What is the relationship between price and quantity demanded based on the law of demand?

Price and quantity demanded are negatively related Signup and view all the answers

Which type of relationship is represented when the graph of two variables forms a straight line?

Linear relationship Signup and view all the answers

What factors can shift the demand curve aside from price?

Consumer income and preferences Signup and view all the answers

Which statement correctly describes a negative correlation?

X decreases while Y increases Signup and view all the answers

What does a change in demand represent?

A shift of the entire demand curve Signup and view all the answers

What does a change in quantity supplied refer to?

A movement from one point on a supply curve to another Signup and view all the answers

Which of the following factors will cause a shift in the supply curve?

Changes in the prices of inputs Signup and view all the answers

In a perfectly competitive market, what role do buyers and sellers play regarding prices?

They are price takers Signup and view all the answers

What happens to equilibrium price and quantity when there is an increase in demand?

Equilibrium price increases and quantity increases Signup and view all the answers

What is indicated by a change in supply?

A shift of the entire supply curve Signup and view all the answers

Which of the following statements about quantity supplied is true?

It can vary at different price levels. Signup and view all the answers

Which factor is NOT typically considered to shift the supply curve?

Consumer preferences Signup and view all the answers

What occurs when there is a simultaneous increase in supply?

Equilibrium price decreases and quantity increases. Signup and view all the answers

What effect does a decrease in supply have on equilibrium price and quantity?

Increases equilibrium price and decreases equilibrium quantity Signup and view all the answers

Which statement about absolute price and relative price is correct?

Absolute price refers to the cost per unit of a product Signup and view all the answers

How is demand defined as elastic?

When quantity demanded is highly responsive to price changes Signup and view all the answers

Which factor is likely to increase demand elasticity?

A longer time interval for consumer response Signup and view all the answers

What does the price elasticity of demand measure?

The responsiveness of quantity demanded to a change in the product's own price Signup and view all the answers

What happens to total expenditure when demand is elastic and the price falls?

Total expenditure increases Signup and view all the answers

Under what condition does total expenditure reach a maximum?

When demand is unit-elastic Signup and view all the answers

Which of the following statements is true about long-run versus short-run demand elasticity?

Demand is more elastic in the long run Signup and view all the answers

What is the formula for supply elasticity as defined?

Percentage change in quantity supplied / percentage change in price Signup and view all the answers

Which factor does NOT affect the elasticity of supply?

Nature of consumer preferences Signup and view all the answers

If a product has an income elasticity of demand greater than zero, what type of good is it?

Normal good Signup and view all the answers

What does a cross elasticity of demand value of less than zero indicate?

The goods are complements Signup and view all the answers

What does the burden of an excise tax depend on?

The relative elasticities of demand and supply Signup and view all the answers

Which statement correctly describes luxuries and necessities regarding income elasticity?

Necessities typically have lower income elasticity than luxuries. Signup and view all the answers

In partial-equilibrium analysis, what is primarily ignored?

The feedback effects from other markets Signup and view all the answers

How does an excise tax impact the price experienced by consumers and producers?

It raises the price for consumers but lowers it for producers. Signup and view all the answers

What happens when a price floor is binding?

It leads to excess supply. Signup and view all the answers

Which of the following is an example of a price ceiling?

Rent controls. Signup and view all the answers

What is a potential consequence of binding rent controls?

Housing shortages. Signup and view all the answers

Which of the following statements best describes the effect of a price ceiling when it is binding?

It may result in black markets due to excess demand. Signup and view all the answers

How do price controls generally affect economic efficiency?

They create discrepancies between quantity supplied and quantity demanded. Signup and view all the answers

In the context of government price controls, what does the term 'black market' refer to?

Any market where products are sold at illegal prices. Signup and view all the answers

What can lead to potential gains for existing tenants in rent-controlled apartments?

Lower rents compared to market rates. Signup and view all the answers

Which objective does a government NOT typically have when imposing a price ceiling?

Increase market supply. Signup and view all the answers

Study Notes

Causation

Positive correlation: variables move in the same direction
Negative correlation: variables move in opposite directions

Index Numbers

Used to compare changes in variables relative to a base period
Value of index in a given period = (absolute value in given period / absolute value in base period) * 100

Graphing Economic Data

Cross-sectional data: Data collected at a specific point in time
Time-series data: Data collected over a period of time
Scatter diagrams help visualize the relationship between two variables
Functional relations can be expressed verbally, numerically, mathematically, and graphically

Demand, Supply, and Price

Quantity demanded: The amount consumers desire to purchase in a given time period
Quantity bought: The amount consumers actually purchase
Quantity demanded is a flow, not a stock
Law of Demand (Alfred Marshall): Price and quantity demanded are negatively related, ceteris paribus
Demand schedules and curves show the relationship between price and quantity demanded
Shifts in demand curves are caused by changes in variables other than price: average household income, tastes, prices of other products, distribution of income, and expectations about the future
Rightward shift of demand curve: Increase in demand
Leftward shift of demand curve: Decrease in demand
Change in demand: A change in quantity demanded at every price
Change in quantity demanded: A movement along a demand curve
Quantity supplied: The amount firms desire to sell in a given time period
Quantity supplied is a flow, not a stock
Price and quantity supplied are positively related, ceteris paribus
Supply schedules and curves show the relationship between price and quantity supplied
Shifts in supply curves are caused by changes in variables other than price: input prices, technology, government taxes or subsidies, prices of other products, and number of suppliers
Change in supply: A change in quantity supplied at every price
Change in quantity supplied: A movement along a supply curve
Market: A meeting place where buyers and sellers negotiate transactions
In a perfectly competitive market, buyers and sellers are price-takers
Equilibrium price: The price where quantity demanded equals quantity supplied, and the market clears
Four Laws of Supply and Demand:
- Increased demand leads to higher equilibrium price and quantity
- Decreased demand leads to lower equilibrium price and quantity
- Increased supply leads to lower equilibrium price and higher quantity
- Decreased supply leads to higher equilibrium price and lower quantity
Absolute price: The amount of money needed to acquire one unit of a product
Relative price: The price of one good in terms of another
Demand and supply curves are based on relative prices, not absolute prices

Elasticity

Price Elasticity of Demand: Measures the responsiveness of quantity demanded to changes in price
Elastic demand: Quantity demanded is highly responsive to price changes
Inelastic demand: Quantity demanded is not very responsive to price changes
Elasticity is related to the slope of the demand curve, but not identical
Measurement of price elasticity: n = (percentage change in quantity demanded) / (percentage change in price)
Demand elasticity is usually negative, but economists focus on the absolute value
Determinants of demand elasticity:
- Availability of substitutes
- Time interval considered
- Necessity vs. luxury
- Specificity of product definition
When demand is elastic, total expenditure increases when price falls
When demand is inelastic, total expenditure decreases when price fall
Price Elasticity of Supply: Measures the responsiveness of quantity supplied to changes in price
Ns = (percentage change in quantity supplied) / (percentage change in price)
Determinants of supply elasticity:
- Ease of substitution in production
- Time span under consideration
- Nature of production costs
Excise taxes: Taxes on specific products
Burden of an excise tax depends on the relative elasticities of demand and supply, not who pays the tax
Income Elasticity of Demand: Ny = (percentage change in quantity demanded) / (percentage change in income)
Normal goods have Ny > 0
Inferior goods have Ny < 0
Luxuries vs. Necessities: More necessary goods tend to have lower income elasticity
Income elasticities vary with income levels
Cross Elasticity of Demand: Nxy = (percentage change in quantity demanded of good X) / (percentage change in price of good Y)
Substitutes have Nxy > 0
Complements have Nxy < 0

Markets in Action

Partial-equilibrium analysis: Focuses on a single market in isolation, ignoring feedback from other markets
General-equilibrium analysis: Studies all markets simultaneously, considering feedback effects
Government Controlled Prices: Occur when the government sets prices above or below equilibrium
Disequilibrium Prices: Prices set above equilibrium lead to excess supply, while prices set below equilibrium lead to excess demand
Price Floor: Minimum legal price, above equilibrium
Price Ceiling: Maximum legal price, below equilibrium
Black Market: Goods sold at illegal prices, often due to government price controls
Rent Controls: A specific type of price ceiling, usually leading to housing shortages and black markets
Market Efficiency: Measures the overall effect of market interactions on society
Demand reflects value, while supply reflects cost
The equilibrium price reflects the highest price consumers are willing to pay and the lowest price producers are willing to accept

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Description

Explore key concepts in economics, focusing on causation, correlation, and the dynamics of demand and supply. This quiz covers essential topics such as index numbers, graphing economic data, and the law of demand. Test your understanding of these foundational ideas and their application in real-world scenarios.