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Questions and Answers
What is indicated by a rightward shift in the demand curve?
What is indicated by a rightward shift in the demand curve?
What type of data compares variables at one point in time?
What type of data compares variables at one point in time?
How is the value of an index number calculated?
How is the value of an index number calculated?
What is the relationship between price and quantity demanded based on the law of demand?
What is the relationship between price and quantity demanded based on the law of demand?
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Which type of relationship is represented when the graph of two variables forms a straight line?
Which type of relationship is represented when the graph of two variables forms a straight line?
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What factors can shift the demand curve aside from price?
What factors can shift the demand curve aside from price?
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Which statement correctly describes a negative correlation?
Which statement correctly describes a negative correlation?
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What does a change in demand represent?
What does a change in demand represent?
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What does a change in quantity supplied refer to?
What does a change in quantity supplied refer to?
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Which of the following factors will cause a shift in the supply curve?
Which of the following factors will cause a shift in the supply curve?
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In a perfectly competitive market, what role do buyers and sellers play regarding prices?
In a perfectly competitive market, what role do buyers and sellers play regarding prices?
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What happens to equilibrium price and quantity when there is an increase in demand?
What happens to equilibrium price and quantity when there is an increase in demand?
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What is indicated by a change in supply?
What is indicated by a change in supply?
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Which of the following statements about quantity supplied is true?
Which of the following statements about quantity supplied is true?
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Which factor is NOT typically considered to shift the supply curve?
Which factor is NOT typically considered to shift the supply curve?
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What occurs when there is a simultaneous increase in supply?
What occurs when there is a simultaneous increase in supply?
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What effect does a decrease in supply have on equilibrium price and quantity?
What effect does a decrease in supply have on equilibrium price and quantity?
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Which statement about absolute price and relative price is correct?
Which statement about absolute price and relative price is correct?
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How is demand defined as elastic?
How is demand defined as elastic?
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Which factor is likely to increase demand elasticity?
Which factor is likely to increase demand elasticity?
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What does the price elasticity of demand measure?
What does the price elasticity of demand measure?
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What happens to total expenditure when demand is elastic and the price falls?
What happens to total expenditure when demand is elastic and the price falls?
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Under what condition does total expenditure reach a maximum?
Under what condition does total expenditure reach a maximum?
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Which of the following statements is true about long-run versus short-run demand elasticity?
Which of the following statements is true about long-run versus short-run demand elasticity?
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What is the formula for supply elasticity as defined?
What is the formula for supply elasticity as defined?
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Which factor does NOT affect the elasticity of supply?
Which factor does NOT affect the elasticity of supply?
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If a product has an income elasticity of demand greater than zero, what type of good is it?
If a product has an income elasticity of demand greater than zero, what type of good is it?
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What does a cross elasticity of demand value of less than zero indicate?
What does a cross elasticity of demand value of less than zero indicate?
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What does the burden of an excise tax depend on?
What does the burden of an excise tax depend on?
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Which statement correctly describes luxuries and necessities regarding income elasticity?
Which statement correctly describes luxuries and necessities regarding income elasticity?
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In partial-equilibrium analysis, what is primarily ignored?
In partial-equilibrium analysis, what is primarily ignored?
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How does an excise tax impact the price experienced by consumers and producers?
How does an excise tax impact the price experienced by consumers and producers?
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What happens when a price floor is binding?
What happens when a price floor is binding?
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Which of the following is an example of a price ceiling?
Which of the following is an example of a price ceiling?
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What is a potential consequence of binding rent controls?
What is a potential consequence of binding rent controls?
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Which of the following statements best describes the effect of a price ceiling when it is binding?
Which of the following statements best describes the effect of a price ceiling when it is binding?
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How do price controls generally affect economic efficiency?
How do price controls generally affect economic efficiency?
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In the context of government price controls, what does the term 'black market' refer to?
In the context of government price controls, what does the term 'black market' refer to?
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What can lead to potential gains for existing tenants in rent-controlled apartments?
What can lead to potential gains for existing tenants in rent-controlled apartments?
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Which objective does a government NOT typically have when imposing a price ceiling?
Which objective does a government NOT typically have when imposing a price ceiling?
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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.