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A high cross elasticity of demand between two goods indicates that they are substitutes.
A high cross elasticity of demand between two goods indicates that they are substitutes.
True
Match the following types of elasticity with their corresponding definitions:
Match the following types of elasticity with their corresponding definitions:
Income Elasticity = Measures how responsive the demand for a product is to changes in consumer income. Price Elasticity of Supply = The responsiveness of a supply of a good or service after a change in its market price. Cross Elasticity of Demand = An economic concept that measures how the price of one good affects the quantity demanded of another good.
What is the relationship between the price elasticity of demand, the price of a good, and the total revenue of a firm?
What is the relationship between the price elasticity of demand, the price of a good, and the total revenue of a firm?
The price elasticity of demand determines the relationship between the price of a good and the total revenue of a firm.
What are the four factors that determine the price elasticity of demand?
What are the four factors that determine the price elasticity of demand?
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The higher the percentage that a product's price is of a consumer's income, the lower the elasticity of demand.
The higher the percentage that a product's price is of a consumer's income, the lower the elasticity of demand.
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What are the two factors that determine the level of efficiency in an economy under perfect competition?
What are the two factors that determine the level of efficiency in an economy under perfect competition?
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What are the major limitations of perfect competition?
What are the major limitations of perfect competition?
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A monopoly is a market structure where there is only one seller of a product that has no close substitutes.
A monopoly is a market structure where there is only one seller of a product that has no close substitutes.
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What are some examples of barriers to entry in a monopoly?
What are some examples of barriers to entry in a monopoly?
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A natural monopoly is an industry where a single firm can produce the entire output of the market at a lower average cost than multiple firms could.
A natural monopoly is an industry where a single firm can produce the entire output of the market at a lower average cost than multiple firms could.
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Price discrimination occurs when a firm charges different prices to different customers for the same product even though the cost of supplying each customer is the same.
Price discrimination occurs when a firm charges different prices to different customers for the same product even though the cost of supplying each customer is the same.
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What are the three key differences between perfect competition and a monopoly?
What are the three key differences between perfect competition and a monopoly?
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Monopsony occurs when there is a single buyer in a market.
Monopsony occurs when there is a single buyer in a market.
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Total profit is defined as the difference between sales revenue and total costs.
Total profit is defined as the difference between sales revenue and total costs.
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If a firm's economic profit is negative, then its decision-making is optimal.
If a firm's economic profit is negative, then its decision-making is optimal.
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A firm's total revenue is the amount received from sales after deducting all costs.
A firm's total revenue is the amount received from sales after deducting all costs.
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A firm maximizes profits when its economic profit is zero.
A firm maximizes profits when its economic profit is zero.
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In a monopoly, the demand curve of the firm differs from the market demand curve.
In a monopoly, the demand curve of the firm differs from the market demand curve.
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Economic profit takes into account not only explicit costs but also implicit opportunity costs.
Economic profit takes into account not only explicit costs but also implicit opportunity costs.
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Total profit is considered an essential goal for a firm.
Total profit is considered an essential goal for a firm.
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A firm's economic profit can only be positive or negative; it cannot be zero.
A firm's economic profit can only be positive or negative; it cannot be zero.
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Under perfect competition, each firm is considered a 'price maker'.
Under perfect competition, each firm is considered a 'price maker'.
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A perfectly competitive firm can influence the market price by changing its output levels.
A perfectly competitive firm can influence the market price by changing its output levels.
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The presence of many small firms producing identical products increases competition in a market.
The presence of many small firms producing identical products increases competition in a market.
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Perfect information means that all firms and customers are unaware of the prices set by competitors.
Perfect information means that all firms and customers are unaware of the prices set by competitors.
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In a perfectly competitive market, firms can freely enter or exit without obstacles.
In a perfectly competitive market, firms can freely enter or exit without obstacles.
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A variable cost for a firm is an expense that remains constant regardless of output levels.
A variable cost for a firm is an expense that remains constant regardless of output levels.
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The demand curve faced by a perfectly competitive firm is determined by the overall market conditions.
The demand curve faced by a perfectly competitive firm is determined by the overall market conditions.
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Different brands of toothpaste are considered homogeneous products.
Different brands of toothpaste are considered homogeneous products.
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If a good is a necessity, its elasticity is likely to be higher.
If a good is a necessity, its elasticity is likely to be higher.
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The demand for goods with many substitutes is typically inelastic.
The demand for goods with many substitutes is typically inelastic.
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As the duration of a price change increases, the elasticity of demand tends to decrease.
As the duration of a price change increases, the elasticity of demand tends to decrease.
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The broader the definition of a product, the higher the elasticity.
The broader the definition of a product, the higher the elasticity.
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Marginal revenue is the addition to total revenue resulting from the increase of two units of output.
Marginal revenue is the addition to total revenue resulting from the increase of two units of output.
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Complement goods experience an increase in demand when the price of one decreases.
Complement goods experience an increase in demand when the price of one decreases.
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Cross elasticity of demand measures how the price of one good affects the quantity demanded of a related good.
Cross elasticity of demand measures how the price of one good affects the quantity demanded of a related good.
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An output decision is optimal only when the corresponding marginal profit equals zero.
An output decision is optimal only when the corresponding marginal profit equals zero.
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Perfect competition involves a market made up of numerous large firms producing differentiated products.
Perfect competition involves a market made up of numerous large firms producing differentiated products.
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Market size has no effect on the demand for a product or service.
Market size has no effect on the demand for a product or service.
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Consumer expectations can significantly alter current buying behavior.
Consumer expectations can significantly alter current buying behavior.
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Producer's surplus is defined as the difference between market price and marginal cost.
Producer's surplus is defined as the difference between market price and marginal cost.
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If marginal profit is negative, firms should increase their output.
If marginal profit is negative, firms should increase their output.
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Economic profit includes only explicit costs incurred by a firm.
Economic profit includes only explicit costs incurred by a firm.
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In a perfectly competitive market, each firm can significantly influence market prices.
In a perfectly competitive market, each firm can significantly influence market prices.
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The marginal analysis for finding optimal output levels involves assessing if marginal profit is positive or negative.
The marginal analysis for finding optimal output levels involves assessing if marginal profit is positive or negative.
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Efficient allocation of resources ensures some individuals are made worse off.
Efficient allocation of resources ensures some individuals are made worse off.
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In a planned economy, consumers have the freedom to choose their consumption.
In a planned economy, consumers have the freedom to choose their consumption.
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Output selection involves deciding how much of each commodity should be produced.
Output selection involves deciding how much of each commodity should be produced.
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Laissez-faire implies that the government should frequently intervene in market prices.
Laissez-faire implies that the government should frequently intervene in market prices.
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Central planners set production targets and sometimes dictate how firms should meet these targets.
Central planners set production targets and sometimes dictate how firms should meet these targets.
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The invisible hand uses prices to disrupt the organization of production in an economy.
The invisible hand uses prices to disrupt the organization of production in an economy.
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Distribution is the question of how produced goods should be divided among consumers.
Distribution is the question of how produced goods should be divided among consumers.
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Efficiency is less critical when analyzing the economy as a whole compared to individual firms.
Efficiency is less critical when analyzing the economy as a whole compared to individual firms.
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Sunk costs are considered to be a significant barrier to entry for industries due to large initial investments.
Sunk costs are considered to be a significant barrier to entry for industries due to large initial investments.
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A monopoly must always consist of a large firm relative to the market demand.
A monopoly must always consist of a large firm relative to the market demand.
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Technical superiority can help maintain a monopolistic position in an industry.
Technical superiority can help maintain a monopolistic position in an industry.
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Barriers to entry, such as legal restrictions, can encroach upon the public interest.
Barriers to entry, such as legal restrictions, can encroach upon the public interest.
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Monopolies operate with a supply curve like firms in perfect competition.
Monopolies operate with a supply curve like firms in perfect competition.
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A monopolist can freely choose both the price and the quantity of their product.
A monopolist can freely choose both the price and the quantity of their product.
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Economies of scale can create a competitive advantage that leads to natural monopolies.
Economies of scale can create a competitive advantage that leads to natural monopolies.
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The primary reason for monopolistic markets is always related to the size of the firm.
The primary reason for monopolistic markets is always related to the size of the firm.
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Study Notes
Elasticity
- Elasticity measures responsiveness
- High cross elasticity of demand indicates goods competing in the same market, preventing a supplier from controlling price
- Price elasticity of demand is the ratio of percentage change in quantity demanded to percentage change in price
- Elastic demand curve: large percentage change in quantity demanded for a small percentage change in price
- Inelastic demand curve: small percentage change in quantity demanded for a large percentage change in price
Factors affecting price elasticity of demand
- Nature of the good: Necessity (low elasticity) vs. luxury (high elasticity); scarcity (low elasticity)
- Availability of substitutes: Many substitutes (high elasticity)
- Share of consumer's budget: Higher percentage of budget (high elasticity)
- Passage of time: Longer time horizon (high elasticity)
Elasticity as a general concept
- Income elasticity: measures demand responsiveness to income changes
- Price elasticity of supply: measures supply responsiveness to price changes
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Cross elasticity of demand: measures how one good's price affects the quantity demanded of another good
- Substitutes: higher cross elasticity, as price change easily switches demand
- Complements: lower cross elasticity, as goods are consumed together
Effect on total revenue and expenditure
- Revenue = quantity sold × price
- Expenditure = quantity purchased × price
- Customer expenditure equals firm revenue
Other concepts
- Complements: Goods consumed together (e.g., cars and gasoline)
- Substitutes: Goods replacing each other (e.g., Pepsi and Coke)
- Buyer's income: Consumer spending power affects demand
- Price of substitute goods: Availability of similar goods affects demand
- Market size: Total demand for a product or service
- Consumer tastes: Shifts in popularity influence demand
- Consumer expectations: Future price predictions affect current demand
- Technology: Advancements can increase efficiency; increase supply, decrease costs
- Government action: Taxes or subsidies impact production costs; can affect production of goods
- Number of sellers: More sellers, greater supply; fewer sellers, less supply
- Producer expectations: Future price trends impact current supply
Week 6
- Marginal Analysis: optimal decision making based on the addition of one more unit of output
Week 7
- Perfect Competition: Market with numerous small firms, homogeneous products, free entry/exit
-
Perfect Competition Characteristics
- Many buyers and sellers
- Homogeneous products
- Free entry and exit
- Perfect information
Week 9
- Monopoly: Single seller in a market, no close substitutes, barriers to entry
- Monopsony: Single buyer in a market, no close alternatives, unique product
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Description
This quiz explores the concept of elasticity in economics, focusing on price elasticity of demand, cross elasticity, and factors influencing these metrics. It covers the distinctions between elastic and inelastic demand curves and how various factors such as necessity and availability of substitutes affect elasticity.
