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Questions and Answers
What is the difference between the price elasticity of coffee in the short run versus the long run?
Price inelastic in the short run, price elastic in the long run
Explain the concept of a price ceiling and its impact on the market.
Mandated maximum price allowed, results in shortage and welfare loss
What is the purpose of a price floor and what consequences does it bring?
Mandated minimum price allowed, results in surplus and welfare loss
How does government intervention through price controls impact suppliers' production efficiency?
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Explain why primary commodities are often subjected to price ceilings.
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Explain the concept of supply curve and its relationship with price.
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What factors can shift the demand curve?
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Explain the Income Effect in relation to changes in price and income.
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Differentiate between Complementary Goods and Substitutes with examples.
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How do changes in production costs affect the market mechanism?
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Explain the concept of market equilibrium and how it is achieved.
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What is the definition of point elasticity and arc elasticity?
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Explain the concept of cross-price elasticity of demand with an example.
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Why is demand more elastic in the long run compared to the short run?
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How does the concept of income elasticity of demand differ from price elasticity of demand?
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Explain how shortage and welfare loss are related in the context of government intervention.
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How does the elasticity of supply change in the short run versus the long run?
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Study Notes
Elasticity of Demand
- In the short run, coffee is price inelastic due to weather, but in the long run, it becomes price elastic due to plentiful beans and perishability.
Government Intervention - Price Controls
- Price Ceiling: mandated maximum price, usually applied to primary commodities to protect consumers, resulting in shortage and welfare loss.
- Price Floor: mandated minimum price to protect suppliers, resulting in surplus, which the government may subsidize to alleviate.
Elasticity Concepts
- Completely Inelastic Demand: people will buy necessary goods regardless of price (e.g., medicine and water).
- Point Elasticity: price elasticity at a particular point on the demand curve.
- Arc Elasticity: price elasticity calculated over a range of points.
Short Run vs Long Run Elasticities
- Gasoline demand is more elastic in the long run than in the short run due to the ability to change car types.
Cross-Price Elasticity of Demand
- Measures the percentage change in the quantity demanded of one good resulting from a 1% increase in the price of another.
- If goods are complements, cross-price elasticity is negative.
Price Elasticity of Supply
- Measures how much the quantity supplied changes in response to a change in its own price.
Supply and Demand
- Supply is the relationship between the quantity of a good that producers are willing to sell and the price of the good.
- Supply curve is upward sloping: higher prices incentivize producers to produce more.
Non-Price Determinants of Demand
- Price of Related Goods: complementary goods (e.g., ink and printers) and substitutes (e.g., soft drinks and juice).
- Demographic Change
- Real Income of Buyers: higher income shifts the demand curve to the right, increasing quantity demanded.
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Description
This quiz covers various concepts related to price elasticity of demand, including inelastic demand, point vs arc elasticities, short run vs long-run elasticities, and cross-price elasticity. Learn about how price changes impact consumer behavior and market dynamics.