Economics Demand Principles

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Questions and Answers

What effect does a decrease in the price of a substitute good have on the demand for the original good?

Demand for the original good increases.

Demand for the original good remains the same.

Demand for the original good decreases. (correct)

Demand for the original good becomes unstable.

Which factor is NOT a determinant of demand according to the provided content?

Consumer tastes

Price of other products

Government taxes (correct)

Income

What happens to the supply curve when the price of inputs increases?

It shifts outward.

It becomes perfectly elastic.

It shifts inward. (correct)

It remains stationary.

If a technological advancement occurs, what is the most likely outcome for the supply of the good?

Supply will increase at every price. Signup and view all the answers

Which of the following conditions would lead to an outward shift in the demand curve?

An increase in income. Signup and view all the answers

What is the relationship between price and quantity supplied as described in the content?

Positive correlation. Signup and view all the answers

What impact do government taxes have on supply, according to the information provided?

They decrease supply by increasing production costs. Signup and view all the answers

When population increases, how does it generally affect the demand curve?

The demand curve shifts outward. Signup and view all the answers

What happens when the demand for a good increases?

Both price and quantity increase Signup and view all the answers

Which of the following can lead to an increase in the demand for a product?

Increase in consumer income Signup and view all the answers

How does a decrease in demand affect the market equilibrium?

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

If the supply of a product increases, what happens to the equilibrium price and quantity?

Price decreases and quantity increases Signup and view all the answers

What causes the supply curve to shift inward?

Increase in input prices Signup and view all the answers

At the original equilibrium price, if quantity demanded exceeds quantity supplied, what is the market condition?

Shortage Signup and view all the answers

What is the new equilibrium price (P*) after a decrease in supply?

It increases Signup and view all the answers

When adjusting to a decrease in demand, what occurs in the market?

Price decreases and quantity decreases Signup and view all the answers

If the equations for quantity demanded and quantity supplied are Qd = 100 - 3P and Qs = 20 + 2P, what is the equilibrium price?

$16 Signup and view all the answers

At equilibrium, what must be true about quantity demanded and quantity supplied?

Quantity demanded equals quantity supplied Signup and view all the answers

What does an elasticity of supply (Es) value of less than 1 imply about a good?

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

How does the imposition of a tax on a good generally affect the supply curve?

It shifts the supply curve left. Signup and view all the answers

If a good has a negative income elasticity of demand (Ey < 0), what classification does it fall under?

Inferior good. Signup and view all the answers

When the price of good Y increases and leads to a decrease in the quantity demanded of good X, what type of goods are they?

Complements. Signup and view all the answers

Which of the following statements correctly describes an elastic good?

The percentage change in quantity demanded exceeds the percentage change in price. Signup and view all the answers

What is the likely effect on supply when a subsidy is introduced?

Supply increases at all price levels. Signup and view all the answers

How does an increase in the price of Chaga Rum affect the supply of Rhubarb Vodka?

Supply of Rhubarb Vodka decreases. Signup and view all the answers

What happens to the supply of lumber when the price of sawdust wood pellets increases?

Lumber supply increases. Signup and view all the answers

What does excess demand in a market indicate about price?

The price is too low. Signup and view all the answers

What occurs when the price is above the equilibrium price?

There will be excess supply or a surplus. Signup and view all the answers

Which factor does NOT shift the supply curve?

Adjustments in consumer preferences. Signup and view all the answers

What is affected by significant changes in the weather?

Supply of agricultural products. Signup and view all the answers

What happens to the quantity supplied when the market price decreases?

It decreases along the supply curve. Signup and view all the answers

How do firms and individuals behave in relation to market prices?

They are price takers and cannot influence market price. Signup and view all the answers

What causes the market to return to equilibrium when disturbed?

Invisible hand of market forces. Signup and view all the answers

What does an own price elasticity of demand value of 1 indicate?

The percentage change in quantity demanded is equal to the percentage change in price. Signup and view all the answers

Which scenario would result in an increase in total expenditure for an elastic good?

Decreasing the price of the good. Signup and view all the answers

When is a product classified as elastic based on its price elasticity of demand (E)?

When E > 1. Signup and view all the answers

How does total revenue respond to price changes for inelastic goods?

Total revenue decreases when price increases. Signup and view all the answers

What does a price elasticity of supply that is greater than 1 indicate?

Quantity supplied is sensitive to price changes. Signup and view all the answers

If a product has a price elasticity of demand of 0.5, what can be inferred?

The demand is inelastic and changes less than the price changes. Signup and view all the answers

In relation to total expenditure and elasticity, when price rises for an elastic good, what happens to total expenditure?

It will decrease. Signup and view all the answers

Why must the absolute value of own price elasticity of demand be taken into account?

To simplify calculations due to negative relationships between price and quantity demanded. Signup and view all the answers

Which of the following statements is true regarding changes in total expenditure?

Total expenditure moves in the direction of the larger percentage change between quantity demanded and price. Signup and view all the answers

Study Notes

Demand

Demand is the relationship between a good's price and the quantity demanded at each price.
As the price of a good increases, the quantity demanded decreases.
The demand curve is downward sloping.
Factors affecting demand include:
- Income: As income increases, the demand curve shifts outward, indicating an increase in demand. As income decreases, the demand curve shifts inward, indicating a decrease in demand.
- Price of other products:
  - Substitutes: When the price of a substitute decreases, the demand for the original good decreases, shifting the demand curve inward.
  - Complements: When the price of a complement increases, the demand for the good being analyzed decreases, shifting the demand curve inward.
- Consumer's Tastes: As consumer tastes change towards a good, demand increases.
- Population: An increase in population leads to an increase in demand, shifting the demand curve outward.
- Weather: Significant weather changes can affect demand, for example, an increase in demand for sandbags during flooding.
- Other factors: Consumer expectations.

Supply

Supply is the relationship between the price of a good and the quantity supplied at each price.
The supply curve is upward sloping.
As the price of a good increases, the quantity supplied increases.
Factors affecting supply include:
- Price of inputs: As the price of inputs increases, supply decreases, shifting the supply curve inward. As the price of inputs decreases, supply increases, shifting the supply curve outward.
- Technology: Technological improvements generally increase supply, shifting the supply curve outward.
- Government Taxes or Subsidies:
  - Taxes increase the cost of production, decreasing supply and shifting the supply curve inward.
  - Subsidies offset the cost of production, increasing supply and shifting the supply curve outward.
- Price of other products:
  - Substitutes: When the price of a substitute increases, less of the good being analyzed will be supplied, shifting the supply curve inward.
  - Complements: When the price of a complement increases, more of the good being analyzed will be supplied, shifting the supply curve outward.
- Weather: Significant weather changes can affect supply, for example, changes in the supply of agricultural goods.
- Number of Suppliers: Increasing the number of suppliers increases supply, shifting the supply curve outward.

Market Equilibrium

Equilibrium occurs when the supply and demand curves intersect, indicating that quantity demanded equals quantity supplied (Qd = Qs).
The equilibrium price (P*) and quantity (Q*) represent the market-clearing price and quantity.
Market forces act to bring price to equilibrium.
- When the price is below equilibrium (Qd > Qs), there is excess demand. This upward pressure on prices leads to a movement along the demand and supply curves, increasing quantity supplied and decreasing quantity demanded until equilibrium is restored.
- When the price is above equilibrium (Qs > Qd), there is excess supply. This downward pressure on prices leads to a movement along the demand and supply curves, decreasing quantity supplied and increasing quantity demanded until equilibrium is restored.

Shifts in Market Equilibrium

Changes in the determinants of supply and demand shift the respective curves, resulting in changes in equilibrium price and quantity.
Increase in Demand: The demand curve shifts outward, leading to higher equilibrium price and quantity (P* & Q* increase).
Decrease in Demand: The demand curve shifts inward, leading to lower equilibrium price and quantity (P* & Q* decrease).
Increase in Supply: The supply curve shifts outward, leading to lower equilibrium price and higher equilibrium quantity (P* decrease & Q* increase).
Decrease in Supply: The supply curve shifts inward, leading to higher equilibrium price and lower equilibrium quantity (P* increase & Q* decrease).

Elasticity

Elasticity measures the responsiveness of one variable to changes in another variable.
Own Price Elasticity of Demand (E):
- Measures the responsiveness of quantity demanded to a change in the good's own price.
- Calculated as the percentage change in quantity demanded divided by the percentage change in price.
- The absolute value of E is used for analysis.
- E = 1: Unit elastic. The percentage change in quantity demanded is equal to the percentage change in price.
- E > 1: Elastic. The percentage change in quantity demanded is greater than the percentage change in price.
- E < 1: Inelastic. The percentage change in quantity demanded is less than the percentage change in price.
Total Revenue and Elasticity:
- Total revenue (TE) is affected by the own price elasticity of demand.
- TE moves in the same direction as the larger of the changes in Price or Quantity.
- For Elastic goods, TE changes in the direction of the change in quantity.
- For Inelastic goods, TE changes in the direction of the change in price.
Supply Elasticity (Es):
- Measures the responsiveness of quantity supplied to a change in price.
- Calculated as the percentage change in quantity supplied divided by the percentage change in price.
- Es > 1: Elastic supply. The percentage change in quantity supplied is greater than the percentage change in price.
- Es < 1: Inelastic supply. The percentage change in quantity supplied is less than the percentage change in price.
Income Elasticity of Demand (Ey):
- Measures the responsiveness of quantity demanded to a change in income.
- Calculated as the percentage change in quantity demanded divided by the percentage change in income.
- Ey > 1: Elastic. The percentage change in quantity demanded is greater than the percentage change in income.
- Ey < 1: Inelastic. The percentage change in quantity demanded is less than the percentage change in income.
- Ey > 0: Normal good. The quantity demanded increases with an increase in income.
- Ey < 0: Inferior good. The quantity demanded decreases with an increase in income.
Cross Price Elasticity of Demand (Exy):
- Measures the responsiveness of quantity demanded of one good to a change in the price of another good.
- Calculated as the percentage change in quantity demanded of good X divided by the percentage change in the price of good Y).
- Exy < 0: Complements. The quantity demanded of good X decreases when the price of good Y increases.
- Exy > 0: Substitutes. The quantity demanded of good X increases when the price of good Y increases.
Elasticity and Taxes:
- When a tax is placed on a good, it shifts the supply curve to the left, creating a "tax-shifted supply curve."
- The burden of the tax (tax incidence) refers to who pays more of the tax: demanders or suppliers.
- Taxes are generally passed onto the consumer from the supplier for inelastic goods.

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Description

This quiz covers the essential principles of demand in economics. You will explore concepts such as the relationship between price and quantity demanded, factors affecting demand, and the characteristics of the demand curve. Test your understanding of how income, substitutes, complements, and consumer preferences influence demand.