Price Elasticity of Demand

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Questions and Answers

Which branch of economics focuses on the study of individual economic agents, such as households and firms, and their interactions in various markets?

  • Behavioral economics
  • Macroeconomics
  • Microeconomics (correct)
  • International economics

What is the law of supply and demand?

  • The price of a good or service and the quantity supplied of that good or service are inversely related.
  • The price of a good or service and the quantity demanded of that good or service are inversely related.
  • The price of a product and the quantity demanded of that product are directly related.
  • The price of a product and the quantity supplied of that product are directly related. (correct)

What do supply and demand curves visually represent?

  • The relationship between price and consumer behavior.
  • The relationship between price and quantity supplied.
  • The relationship between price and quantity demanded.
  • The relationship between price and quantity demanded and supplied. (correct)

Which of the following is an example of a fixed cost?

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

What is the relationship between average variable costs (AVC) and marginal costs (MC) in the short run?

<p>They initially decrease and then increase (B)</p> Signup and view all the answers

What is the formula for calculating total costs (TC)?

<p>TC = FC + VC (C)</p> Signup and view all the answers

In a perfectly competitive market, who has control over pricing?

<p>Competitive forces (D)</p> Signup and view all the answers

Which of the following factors can affect price elasticity of demand?

<p>Availability of substitutes (B)</p> Signup and view all the answers

Which market structure is characterized by a large number of small, homogeneous firms with no market power?

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

Which market structure is characterized by a single firm dominating a market with no close substitute?

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

Which market structure is characterized by a small number of interdependent firms dominating the market?

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

Which of the following statements about long-run costs is true?

<p>Long-run costs are incurred when all inputs are adjusted to reach a desired level of output. (C)</p> Signup and view all the answers

Which of the following can lead to lower production costs?

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

What does the long-run average cost (LRAC) represent?

<p>The lowest cost per unit of output achievable when all inputs can be adjusted. (A)</p> Signup and view all the answers

Which of the following factors can affect the supply of goods and services?

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

What is the definition of price elasticity of demand?

<p>A measure of how sensitive the demand for a good or service is to changes in its price (C)</p> Signup and view all the answers

What does it mean when demand is considered elastic?

<p>Consumers are highly sensitive to price changes, and a price increase will significantly reduce demand (C)</p> Signup and view all the answers

What happens when the price is below the equilibrium level in a market?

<p>Quantity demanded exceeds quantity supplied, causing a shortage (B)</p> Signup and view all the answers

Which of the following market structures is characterized by a large number of firms selling differentiated products?

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

Which of the following factors can affect price elasticity of demand?

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

Which of the following market structures is characterized by a single firm dominating a market with no close substitute?

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

What is the relationship between average variable costs (AVC) and marginal costs (MC) in the short run?

<p>AVC &lt; MC (D)</p> Signup and view all the answers

Which of the following statements accurately describes the law of supply and demand?

<p>The price of a good or service and the quantity supplied of that good or service are directly related. (B)</p> Signup and view all the answers

What is the formula for calculating price elasticity of demand?

<p>PED = (Q2 - Q1) / (P2 - P1) (B)</p> Signup and view all the answers

Which of the following market structures is characterized by a large number of small, homogeneous firms with no market power?

<p>Perfect competition (D)</p> Signup and view all the answers

Which of the following cost concepts represents the change in total costs resulting from producing one more unit of output?

<p>Marginal Costs (MC) (B)</p> Signup and view all the answers

In the short run, which of the following cost concepts initially decrease due to increasing returns to scale, but eventually increase due to diminishing marginal returns?

<p>Average Variable Costs (AVC) (D)</p> Signup and view all the answers

What is the relationship between average variable costs (AVC) and marginal costs (MC) in the short run?

<p>AVC &lt; MC (A)</p> Signup and view all the answers

What is the formula for calculating total costs (TC)?

<p>TC = FC + VC (A)</p> Signup and view all the answers

Which of the following factors can affect the demand for goods and services?

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

What is the formula for calculating price elasticity of demand?

<p>(\frac{\text{percentage change in quantity demanded}},{\text{percentage change in price}}) (A)</p> Signup and view all the answers

What does it mean when demand is considered inelastic?

<p>A given percentage change in price leads to a smaller percentage change in quantity demanded (A)</p> Signup and view all the answers

What happens when the price is above the equilibrium level in a market?

<p>Quantity supplied exceeds quantity demanded, resulting in a surplus (B)</p> Signup and view all the answers

Which of the following statements about long-run costs is true?

<p>Long-run costs are incurred when all inputs are adjusted to reach a desired level of output. (D)</p> Signup and view all the answers

What do economies of scale refer to?

<p>Economies of scale occur when the average cost of producing a good or service decreases as the quantity produced increases. (A)</p> Signup and view all the answers

What can lead to lower production costs?

<p>Technological advancements and increasing market competition. (C)</p> Signup and view all the answers

Flashcards

Microeconomics

The study of individual economic agents, such as households and firms, and their interactions in various markets.

Law of Supply and Demand

The principle that the price of a good or service will adjust to a point where the quantity supplied equals the quantity demanded.

Supply and Demand Curves

Graphs that show the relationship between the price of a good or service and the quantity supplied or demanded.

Fixed Costs

Costs that remain the same regardless of the level of output produced.

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Average Variable Cost (AVC)

Total variable cost divided by the quantity of output.

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Marginal Cost (MC)

The additional cost incurred when producing one more unit of output.

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Total Cost (TC)

The total cost of production, calculated by adding total fixed cost and total variable cost.

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Perfect Competition

A market structure where many small firms compete against each other, none of whom have any market power.

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Monopoly

A market dominated by a single firm with no close substitutes.

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Oligopoly

A market structure where a few interdependent firms dominate the market.

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Monopolistic Competition

A market structure with many firms selling differentiated products, creating competition but not perfect substitutes.

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Price Elasticity of Demand

A measure of how responsive the quantity demanded of a good or service is to changes in its price.

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Definition of Price Elasticity of Demand

The percentage change in quantity demanded divided by the percentage change in price.

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Elastic Demand

When a small change in price leads to a large change in quantity demanded.

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Inelastic Demand

When a large change in price leads to a small change in quantity demanded.

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Long-Run Costs

In the long run, firms can adjust all inputs, including fixed costs, to maximize profits.

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Long-Run Average Cost (LRAC)

The minimum cost per unit of output in the long run.

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Economies of Scale

The reduction in long-run average cost as production increases.

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Factors Affecting Supply

Changes in production costs, technology, and expectations can shift the supply curve.

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Factors Affecting Demand

Changes in price, income, tastes, and expectations can shift the demand curve.

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Equilibrium

The point where the supply and demand curves intersect, indicating the price and quantity at equilibrium.

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Shortage

When the price is below the equilibrium level, resulting in a shortage of the good or service.

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Surplus

When the price is above the equilibrium level, resulting in a surplus of the good or service.

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Study Notes

Microeconomics

  • Microeconomics is the branch of economics that focuses on the study of individual economic agents, such as households and firms, and their interactions in various markets.

Law of Supply and Demand

  • The law of supply and demand states that the price and quantity of a good or service will adjust to equilibrium, where the quantity supplied equals the quantity demanded.

Supply and Demand Curves

  • Supply and demand curves visually represent the relationship between the price of a good or service and the quantity supplied or demanded.

Costs

  • Fixed costs are expenses that remain the same even if the firm produces more or less output, such as rent or salaries.
  • The relationship between average variable costs (AVC) and marginal costs (MC) in the short run is that AVC is the total variable cost per unit of output, while MC is the additional cost of producing one more unit.
  • The formula for calculating total costs (TC) is TC = TFC + TVC, where TFC is total fixed cost and TVC is total variable cost.

Market Structure

  • In a perfectly competitive market, no single firm has control over pricing.
  • A perfectly competitive market is characterized by a large number of small, homogeneous firms with no market power.
  • A monopoly is a market structure characterized by a single firm dominating a market with no close substitute.
  • An oligopoly is a market structure characterized by a small number of interdependent firms dominating the market.
  • A monopolistically competitive market is characterized by a large number of firms selling differentiated products.

Price Elasticity of Demand

  • Price elasticity of demand is a measure of how responsive the quantity demanded of a good or service is to changes in its price.
  • The definition of price elasticity of demand is the percentage change in quantity demanded in response to a 1% change in price.
  • When demand is considered elastic, a small change in price leads to a large change in quantity demanded.
  • When demand is considered inelastic, a large change in price leads to a small change in quantity demanded.

Long-Run Costs

  • In the long run, firms can adjust all inputs, including fixed costs, to maximize profits.
  • Long-run average cost (LRAC) represents the minimum cost per unit of output in the long run.
  • Economies of scale refer to the reduction in long-run average cost due to increased production.

Factors Affecting Supply and Demand

  • Factors that can affect the supply of goods and services include changes in production costs, technology, and expectations.
  • Factors that can affect the demand for goods and services include changes in price, income, tastes, and expectations.

Equilibrium

  • When the price is below the equilibrium level in a market, there is a shortage of the good or service.
  • When the price is above the equilibrium level in a market, there is a surplus of the good or service.

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