Microeconomics: Two-Sector Model
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Questions and Answers

What do firms use as an input to produce goods and services?

  • Households
  • Revenue
  • Factors of production (correct)
  • Goods and services

    • In a two-sector model, what do households sell to firms?

  • Revenue
  • Factors of production (correct)
  • Labour only
  • Goods and services

    • What do firms sell to households in a two-sector model?

  • Goods and services (correct)
  • Revenue
  • Factors of production
  • Labour

    • What flows from households to firms in a two-sector model?

    <p>Factors of production (A)</p> Signup and view all the answers

    What represents expenditure by firms to purchase factors of production?

    <p>Spending (A)</p> Signup and view all the answers

    In a three-sector model, which additional sector is involved in economic activities?

    <p>Government (B)</p> Signup and view all the answers

    What flows from firms to households in a two-sector model?

    <p>Income (C)</p> Signup and view all the answers

    What is represented by the flow of Birr in Figure 1.4?

    <p>Flow of income (A)</p> Signup and view all the answers

    What is the market demand function given by?

    <p>Q = 20 - 2P (B)</p> Signup and view all the answers

    What happens to the demand curve when there is a change in the price of a product?

    <p>It moves along the same curve (B)</p> Signup and view all the answers

    Which of the following is NOT a determinant of demand?

    <p>Quantity supplied (C)</p> Signup and view all the answers

    What is the result of an increase in demand?

    <p>The demand curve shifts upwards (B)</p> Signup and view all the answers

    Which of the following is an example of a demand shifter?

    <p>Change in the taste or preference of consumers (C)</p> Signup and view all the answers

    What happens to the demand curve when there is a decrease in demand?

    <p>It shifts to the left (A)</p> Signup and view all the answers

    What is the result of a change in any determinant of demand except the good's price?

    <p>A shift of the demand curve (C)</p> Signup and view all the answers

    What is the relationship between the price of a product and the quantity demanded?

    <p>Inversely proportional (C)</p> Signup and view all the answers

    What is derived by horizontally adding the quantity supplied of the product by all sellers at each price?

    <p>Market supply (D)</p> Signup and view all the answers

    Which of the following is NOT a determinant of supply?

    <p>Number of buyers in the market (A)</p> Signup and view all the answers

    What happens to the supply curve when there is an increase in the price of inputs?

    <p>It shifts inward (D)</p> Signup and view all the answers

    What is the effect of technological advancement on the supply curve?

    <p>It shifts outward (A)</p> Signup and view all the answers

    What is the effect of a decrease in input price on the supply of a product?

    <p>It increases (A)</p> Signup and view all the answers

    Which of the following is an example of a determinant of supply that is related to natural factors?

    <p>Weather (B)</p> Signup and view all the answers

    What happens to the quantity supplied by seller 1 when the price per unit is $5?

    <p>It is 11 (D)</p> Signup and view all the answers

    What is the market supply when the price per unit is $4?

    <p>30.5 (B)</p> Signup and view all the answers

    What type of goods are those that satisfy the same type of demand and can be used in place of one another?

    <p>Substitute goods (B)</p> Signup and view all the answers

    Which of the following factors determines price elasticity of demand?

    <p>All of the above (C)</p> Signup and view all the answers

    What is the term for the degree of responsiveness of quantity demanded of a commodity to change in any of its determinants?

    <p>Elasticity of demand (B)</p> Signup and view all the answers

    Which type of goods is characterized by a decrease in demand with an increase in income?

    <p>Inferior goods (A)</p> Signup and view all the answers

    What is the term for goods that are used jointly or together?

    <p>Complementary goods (B)</p> Signup and view all the answers

    What is the purpose of adding individual demand curves horizontally to get the market demand curve?

    <p>To find the total quantity demanded at a given price (B)</p> Signup and view all the answers

    What type of elasticity of demand measures the responsiveness of quantity demanded to a change in the price of a related good?

    <p>Cross price elasticity of demand (D)</p> Signup and view all the answers

    Which of the following is NOT a type of elasticity of demand?

    <p>Supply elasticity (B)</p> Signup and view all the answers

    What is the main role of a government in the economy?

    <p>To provide public goods and services to the society (C)</p> Signup and view all the answers

    What is the product market?

    <p>A market where goods and services are transacted/exchanged (A)</p> Signup and view all the answers

    What is the flow of economic resources and final goods and services represented by in the circular-flow diagram?

    <p>Clockwise direction (D)</p> Signup and view all the answers

    What do households receive when they supply their resources to firms in the factor market?

    <p>Income (B)</p> Signup and view all the answers

    What is the purpose of the circular-flow diagram?

    <p>To show the interaction between households, firms, and government (D)</p> Signup and view all the answers

    What is the factor market?

    <p>A market where economic units transact/exchange factors of production (A)</p> Signup and view all the answers

    What do business firms receive when they sell goods and services to households in the product market?

    <p>Revenue (B)</p> Signup and view all the answers

    What is represented by the anti-clockwise direction in the circular-flow diagram?

    <p>The flow of birr in the form of revenue, income and spending on consumption (A)</p> Signup and view all the answers

    Study Notes

    Circular Flow of Income with Two-Sector Model

    • The circular flow of income represents expenditure by firms to purchase factors of production, used as inputs to produce goods and services.
    • The two-sector model consists of households and firms interacting in two markets: product market and factor market.
    • In the product market, firms sell goods and services to households, and in the factor market, households sell factors of production to firms.

    Circular Flow of Income with Three-Sector Model

    • The three-sector model involves the government, which has legal and political power to control or influence households, firms, and markets.
    • The government provides public goods and services to society.
    • The three economic agents (households, firms, and government) interact in two markets: product market and factor market.

    Demand

    • The demand for a product is influenced by many factors, including:
    • Price of the product
    • Taste or preference of consumers
    • Income of consumers
    • Price of related goods
    • Consumers' expectations of income and price
    • Number of buyers in the market
    • A change in any of these factors, except the price of the good, will change the demand, causing a shift in the demand curve.
    • A change in the price of the good, while keeping other factors constant, will result in a movement along the same demand curve.

    Determinants of Demand

    • Price of the product
    • Taste or preference of consumers
    • Income of consumers
    • Price of related goods
    • Consumers' expectations of income and price
    • Number of buyers in the market

    Changes in Demand

    • A change in demand will shift the demand curve from its original location.
    • If buyers choose to purchase more at any price, the demand curve shifts rightward (an increase in demand).
    • If buyers choose to purchase less at any price, the demand curve shifts leftward (a decrease in demand).

    Market Supply

    • Market supply is derived by horizontally adding the quantity supplied of the product by all sellers at each price.
    • The supply of a particular product is determined by:
    • Price of inputs (cost of inputs)
    • Technology
    • Prices of related goods
    • Sellers' expectations of price of the product
    • Taxes and subsidies
    • Number of sellers in the market
    • Weather, etc.

    Determinants of Supply

    • Price of inputs (cost of inputs)
    • Technology
    • Prices of related goods
    • Sellers' expectations of price of the product
    • Taxes and subsidies
    • Number of sellers in the market
    • Weather, etc.

    Types of Goods

    • Normal good: a good for which the demand increases with increases in income
    • Inferior good: a good for which the demand tends to fall with an increase in the income of the consumer
    • Substitute goods: goods that satisfy the same type of demand and can be used in place of one another
    • Complementary goods: goods that are used jointly or together
    • Giffen goods: goods whose demand falls with a fall in their prices

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    Description

    Understand the concept of expenditure by firms to purchase factors of production in a two-sector model, including revenue, markets, and goods and services.

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