ECON 111 | Price Elasticity, Demand and Supply Concepts Short Answer Quiz

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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?

Disincentivizes suppliers from producing more and efficiently Signup and view all the answers

Explain why primary commodities are often subjected to price ceilings.

To protect consumers Signup and view all the answers

Explain the concept of supply curve and its relationship with price.

The supply curve shows the quantity of a good that producers are willing to sell at different prices. It is upward sloping, meaning as the price increases, firms are willing to produce and sell more. Signup and view all the answers

What factors can shift the demand curve?

Factors like income level, prices of other goods, and demographic changes can shift the demand curve. Signup and view all the answers

Explain the Income Effect in relation to changes in price and income.

The Income Effect occurs when price falls and income is retained, leading to an increase in demand for the good. Signup and view all the answers

Differentiate between Complementary Goods and Substitutes with examples.

Complementary Goods are goods that are consumed together, like ink and printers. Substitutes are goods that can replace each other, like soft drinks and juice. Signup and view all the answers

How do changes in production costs affect the market mechanism?

If production costs fall, firms can either produce the same quantity at a lower price or produce a greater quantity at a greater price. Signup and view all the answers

Explain the concept of market equilibrium and how it is achieved.

Market equilibrium is the point where quantity demanded equals quantity supplied, leading to a stable price. It is achieved when supply and demand curves intersect. Signup and view all the answers

What is the definition of point elasticity and arc elasticity?

Point: Price elasticity at a particular point on the demand curve. Arc: Price elasticity calculated over a range of points. Signup and view all the answers

Explain the concept of cross-price elasticity of demand with an example.

Cross-price elasticity of demand measures the percentage change in the quantity demanded of one good resulting from a 1-percent increase in the price of another. For complements, the cross-price elasticity is negative. Signup and view all the answers

Why is demand more elastic in the long run compared to the short run?

In the long run, consumers have more time to adjust to price changes by making changes such as switching to more fuel-efficient cars, leading to a larger effect of price increases on quantity demanded. Signup and view all the answers

How does the concept of income elasticity of demand differ from price elasticity of demand?

Income elasticity of demand measures the responsiveness of quantity demanded to changes in income, while price elasticity of demand measures the responsiveness to changes in price. Signup and view all the answers

Explain how shortage and welfare loss are related in the context of government intervention.

Shortage occurs when quantity demanded exceeds quantity supplied, leading to welfare loss. Government interventions like price controls can exacerbate shortages and increase welfare loss. Signup and view all the answers

How does the elasticity of supply change in the short run versus the long run?

In the short run, supply is less elastic as producers have limited time to adjust production. In the long run, supply becomes more elastic as producers can make significant adjustments. Signup and view all the answers

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.