ECON 1000 Lecture Notes - Lecture 3: Marginal Cost, Complementary Good, Economic Equilibrium

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Chapter 3- demand and supply chapter 3- demand and supply. Market: arrangement that gives info to, and connects buyers and sellers. Competitive market: market with many buyers and sellers, no single buyer/seller influences price. Money price: price needed to buy a good. Relative price: ratio of money price of a good with price of its next best alternative. If you demand something, you: want it, can afford it, definite plan to buy it. Quantity demanded: amount of good/service a customer plans to buy with specified time and price law of demand. Ceteris paribus (other things remaining constant), as price goes up, quantity demanded goes down why does change in price change quantity demanded: substitution effect. When the opportunity cost of a good/service increases, people seek substitutes, thus quantity demanded decreases. When price of good/service rises relative to income, people can no longer afford, thus quantity demanded decreases real income. Demand: relationship between price of the good and quantity demanded.

Related Questions

1)The law of demand states that as the price of a good rise, _____.

A. buyers purchase more of the good because the price of a substitute has risen.

B. buyers purchase less of the good because their real income decreases with an increase in price.

C. buyers purchase more of the good because they expect prices to be even higher in the future

D. buyers purchase less of the good because they expect prices to fall in the future.

2) A movement along a demand curve can be attributed to a change in:

A. the quantity demanded of a good.

B. the demand for a good.

C. the substitution effect of consuming a good.

D. the opportunity cost of producing a good.

3) If we say that demand for a good has increased, we mean that there has been:

A. a leftward shift of the demand curve.

B. a rightward shift of the demand curve.

C. a leftward movement along the demand curve.

D. a rightward movement along the demand curve.

4) Which of the following will cause the demand curve for a normal good to shift to the right?

A. An increase in the price of a complementary good.

B. A decrease in income.

C. A decrease in the price of the good.

D. An increase in the price of a substitute good.

5)Which of the following best defines supply?

A. The amount of a good that is produced at the least possible cost, other things constant

B. The amount of a good that producers are willing and able to sell at each possible price, other things constant.

C. The amount of a good that consumers want to buy at different income levels

D. The amount of a good that producers want to sell at a fixed price

6)The market supply curve of a particular product indicates the total quantities:

A. that are actually sold during a given time period.

B. that sellers are willing to offer for sale at a fixed price.

C. that buyers are willing to purchase at alternative prices.

D. that sellers are willing and able to offer at alternative prices.

7)When quantity demanded of a good exceeds the quantity supplied at the prevailing market price, _____.

A. the demand curve shifts rightward until the surplus is eliminated

B. the market is in equilibrium.

C. the price of the good will tend to increase.

D. the price of the good will decrease

8)A shortage of textbooks is most likely to cause:

A. an increase in the price of textbooks.

B. a decrease in the supply of textbooks.

C. a decrease in the price of paper.

D. an increase in the cost of printing.

9)The most important characteristic of the equilibrium price is that it:

A. maximizes the quantity demanded.

B. clears the market, leaving neither a surplus nor a shortage.

C. minimizes the quantity demanded.

D. guarantees that producers earn the profit.

10)If both demand and supply increases in a market that is initially in equilibrium, the price will:

A. increase only if demand increases more than supply.

B. increase only if supply increases more than demand.

C. remain unchanged while quantity will increase.

D. remain unchanged while quantity will decrease.

lavendertrout13

When demand for a good is very elastic, revenue ________ when the price falls.

(2)

An elasticity measure less than one means that demand is __________.

(3)

An elasticity measure greater than one means that demand is __________.

(4)

The Latin expression ceteris paribus means

	having made all other necessary changes.
	holding constant all other variables.
	assuming all households have similar incomes.
	given the level of income in the economy.

(5)

A variable measured in terms of money is called a ____________________.

	real variable
	nominal variable
	macroeconomic variable
	microeconomic variable

(6)

Which of the following is true about the importance of money in economics?

	Money is important in both macroeconomics and microeconomics.
	Money is important in macroeconomics but not microeconomics.
	Money is important in microeconomics but not macroeconomics.
	Money is not important in either microeconomics or macroeconomics.

(7)

What is the difference between normative and positive economics?

	Positive economics is descriptive and predictive; normative economics is prescriptive.
	Positive economics highlights the positive aspects of the economy; normative economics highlights the average features.
	Positive economics studies the actions of individuals; normative economics studies the actions of households.
	Positive economics is an applied social science; normative economics is a theoretical social science.

(8)

The slope of the demand curve is negative because

	the quantity of a good demanded decreases as income declines.
	the quantity of a good demanded increases as income declines.
	the quantity of a good demanded increases as the price declines.
	the quantity of a good demanded decreases as the price declines.

(9)

What is the result of an increase in the price of bread, a normal good?

	The demand curve shifts to the right.
	The demand curve shifts to the left.
	The quantity demanded increases.
	The quantity demanded decreases.

(10)

What is the effect on demand for bread when the price of bagels, a substitute for bread, rises?

	The demand curve for bread shifts to the right.
	The demand curve for bread shifts to the left.
	The quantity of bread demanded increases.
	The quantity of bread demanded decreases.

(11)

Which of the following would cause the supply curve for bread to shift inward?

	An increase in the price of bread
	An increase in the price of bagels
	A decrease in the price of bread
	An increase in the price of flour

(12)

An improvement in technology shifts the supply curve outward because

	at every price, firms find producing the good to be more profitable.
	the price of the good increases.
	at every price, firms find producing the good to be less profitable.
	the price of the good decreases.

(13)

Which of the following factors does not affect how much bread a baker is willing to produce?

	The price of bread
	The demand for bread
	The cost of inputs
	Technology

(14)

How do expectations of prices affect how much of a good producers are willing to sell?

	Expectations of prices affect only demand, not supply.
	Actual prices, not expectations of prices, affect supply.
	If producers expect prices to fall in the future, they supply less at every price.
	If producers expect prices to rise in the future, they supply less at every price.

(15)

When the price of a good is above equilibrium level,

	the quantity demanded exceeds the quantity supplied.
	the quantity supplied exceeds the quantity demanded.
	the supply curve shifts to the left.
	the supply curve shifts to the right.

(16)

At a price of P₀ in the diagram below, which of the following statements is true?

	Supply equals demand.
	There is excess demand.
	There is excess supply.
	There is scarcity.

(17)

If demand for bread increases at every price, the equilibrium price of bread will

	fall.
	rise.
	remain unchanged.
	depend on income.

(18)

If the demand for bread declines, then

	at the original equilibrium price, there is excess demand.
	at the original equilibrium price, there is excess supply.
	the supply curve shifts to the right.
	the supply curve shifts to the left.

(19)

Peanut butter and jelly are complementary goods. When the price of peanut butter rises, the demand for jelly ________ and the price of jelly ________.

	rises; falls
	rises; rises
	falls; rises
	falls; falls

(20)

The measure of elasticity that economists use is

	always a positive number.
	always a negative number.
	positive when demand is elastic and negative when demand is inelastic.
	negative when demand is elastic and positive when demand is inelastic.

(21)

Which of the following formulas is the correct expression for the slope of a line?

(22)

Graphically how would an increase in income affect the demand for hamburgers?

	The slope of the demand curve would increase.
	The slope of the demand curve would decrease.
	The demand curve would shift outward, parallel to the original demand curve.
	The demand curve would shift inward, parallel to the original demand curve.

(23)

Given the equation P = $6.00 ? $.40Q, where P is the price of the good and Q is the quantity of the good demanded, how many units will this consumer demand if the price is $3.60?

	1.44 units
	3 units
	3.6 units
	6 units

(24)

Which of the following is true about unit elasticity?

	Revenues remain unchanged when the price changes.
	Elasticity of demand increases as one moves down the demand curve.
	Elasticity of demand decreases as one moves down the demand curve.
	The elasticity of demand is greater than one at every point along the demand curve.

(25)

Which of the following could be a determinant of the quantity demanded of a good?

	The price of the good
	The price of related goods
	Income
	Expectations about the future price of the product
	All of the above

violethare488

Answer the following 24 questions.

1. The elasticity that measures how sensitive the buyers of a good are to a change in the price of another good is called:

a. price-elasticity of demand

b. income-elasticity of demand

c. cross-price-elasticity of demand

d. price-elasticity of supply

2. If the price of walnuts rises, many people would switch from consuming walnuts to consuming pecans. But if the price of salt rises, people would have difficulty purchasing something to use in its place. These examples illustrate the importance of

a. the availability of close substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

3. Suppose that Juan Carlos is filling out a survey that he received in the mail. The survey asks him what he would do if the price of his favorite toothpaste increased. Juan Carlos reports that he would switch to a different brand. The survey asks what he would do if the price of all kinds of toothpaste increased. Juan Carlos reports that he must use toothpaste, so he would have to adjust his spending elsewhere. These examples illustrate the importance of

a. changes in total revenue in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition (broad vs narrow) of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

4. Suppose that gasoline prices increase dramatically this month. Lola commutes 100 miles to work each weekday. Over the next few months, Lola drives less on the weekends to try to save money. Within the year, she sells her home and purchases one only 10 miles from her place of employment. These examples illustrate the importance of

a. the availability of substitutes in determining the price elasticity of demand.

b. a necessity versus a luxury in determining the price elasticity of demand.

c. the definition of a market in determining the price elasticity of demand.

d. the time horizon in determining the price elasticity of demand.

5. When a smartphone manufacturer introduces a phone with new features (like a more powerful camera, more storage, a screen with better definition, or being waterproof) and advertises them, it is

a. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

b. trying to decrease buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

c. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having more substitutes in the market.

d. trying to increase buyers' price-elasticity of demand by differentiating the goods relative to the competition so that consumers perceive it as having no close substitutes in the market.

6. Consider the following two alternative scenarios.

1) In scenario 1, the price of all smartphones increases by 10%.

2) In scenario 2, the price of Samsung smartphones increases by 10% while the price of all other smartphones stays the same as before.

Which of the following is true?

a. The quantity demanded of Samsung phones in scenario 2 falls by more, in percentage terms, than the quantity demanded of all phones in scenario 1.

b. The quantity demanded of Samsung phones in scenario 2 falls by less, in percentage terms, than the quantity demanded of all phones in scenario 1.

7. As more electric car models appear in the market, the price elasticity of demand for the models already in the market should

a. Stay the same. In other words, buyers' sensitivity to changes in the price of the existing cars does not change.

b. Increase. In other words, buyers' sensitivity to changes in the price of the existing cars increases.

c. Decrease. In other words, buyers' sensitivity to changes in the price of the product of the car decreases.

8. Demand for a good is likely to be flatter if

a. the good has many substitutes

b. the good is narrowly defined

c. we are considering the long run rather than the short run

d. the good is a luxury.

e. All of the above.

9. If the price elasticity of the demand for ice-cream is equal to 1.5, then

a. a 1% increase in price will lead to a 1.5% increase in quantity demanded.

b. a 1% increase in price will lead to a 150% fall in quantity demanded.

c. a 1% increase in price will lead to a 15% fall in quantity demanded.

d. a 1% increase in price will lead to a 1.5% fall in quantity demanded.

10. If the price elasticity of demand for oil is 0.7, then

a. Demand is elastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

b. Demand is elastic, buyers are relatively insensitive to price, and the demand curve is relatively flat.

c. Demand is inelastic, buyers are relatively insensitive to price, and the demand curve is relatively steep.

d. Demand is inelastic, buyers are relatively sensitive to price, and the demand curve is relatively flat.

11. Note: this question is not about calculating elasticity, but about showing that you know how to calculate a % change using the midpoint method in any circumstance.

A biology class at Q State University initially had 205 students. After the first test, enrollment dropped to 195 students. Using the midpoint method, the % change in the number of students is equal to

a. 10%

b. approximately 5.12%

c. approximately 4.88%

d. 5%

12. When the price of a good is $5, the quantity demanded is 100 units per month; when the price is $7, the quantity demanded is 80 units per month. Using the midpoint method, the price elasticity of demand is approximately

a. 0.22.

b. 0.67.

c. 1.33.

d. 1.50.

13. If the price elasticity of demand for hamburgers is 0.4, then a 20% increase in the price of hamburgers will lead to

a. an 8% fall in quantity demanded.

b. a 20% fall in quantity demanded.

c. a 0.4% fall in quantity demanded.

d. a 4% fall in quantity demanded.

14. If the price elasticity of demand for cruises is 1.4, a 1% decrease in the price of cruises will lead to a

a. A 1.4% increase in quantity demanded.

b. A 1% increase in quantity demanded.

c. A 1.4% decrease in quantity demanded.

d. A 1% decrease in quantity demanded.

15. A city wants to raise revenues to build a new municipal swimming pool next year. The mayor suggests that the city raise the price of admission to the existing municipal pools this year to raise revenues. The city manager suggests that the city lower the price of admission to raise revenues. Who is correct?

a. the mayor

b. the city manager

c. The answer depends on the price elasticity of demand.

d. The answer depends on the costs of construction of the new municipal swimming pool.

16. When demand is elastic, an increase in price will cause

a. an increase in total revenue.

b. a decrease in total revenue.

c. no change in total revenue.

d. not enough information.

17. Consider luxury weekend hotel packages in Las Vegas. When the price is $250, the quantity demanded is 2,000 packages per week. When the price is $280, the quantity demanded is 1,700 packages per week. Using the midpoint method, the price elasticity of demand is about

a. 1.43, and an increase in the price will cause hotels' total revenue to decrease.

b. 1.43, and an increase in the price will cause hotels' total revenue to increase.

c. 0.70, and an increase in the price will cause hotels' total revenue to decrease.

d. 0.70, and an increase in the price will cause hotels' total revenue to increase.

18. Suppose researchers at the University of Wisconsin discovered a new vitamin that increases the milk production of dairy cows. If the demand for milk is relatively inelastic, the discovery will

a. raise both price and total revenues.

b. lower both price and total revenues.

c. raise the price and lower total revenues.

d. lower price and raise total revenues.

19. When we calculate elasticities, whether the percent changes have a plus or a minus sign matters if we are calculating

a. Price elasticity of demand, because the signs give us information about whether the good is normal or inferior.

b. Income elasticity of demand, because the signs give us information about whether the good is normal or inferior.

c. Cross-price-elasticity of demand, because the signs give us information about whether the goods are substitutes or complements.

d. b and c are both correct.

20. Income elasticity of demand measures how

a. the quantity demanded changes as consumer income changes.

b. consumer purchasing power is affected by a change in the price of a good.

c. the price of a good is affected when there is a change in consumer income.

d. many units of a good a consumer can buy given a certain income level.

21. Last year, Carolyn bought 6 pairs of earrings when her income was $40,000. This year, her income is $52,000, and she purchased 7 pairs of earrings. Holding other factors constant, it follows that Carolyn's income elasticity of demand is about

a. 0.59, and Carolyn regards earrings as an inferior good.

b. 0.59, and Carolyn regards earrings as a normal good.

c. 1.7, and Carolyn regards earrings as an inferior good.

d. 1.7, and Carolyn regards earrings as a normal good.

22. Sandra purchases 5 pounds of coffee and 10 gallons of milk per month when the price of coffee is $10 per pound. She purchases 6 pounds of coffee and 12 gallons of milk per month when the price of coffee is $8 per pound. Sandra's cross-price elasticity of demand for milk with respect to the price of coffee

a. 0.82, and the goods are substitutes.

b. -0.82, and the goods are complements.

c. 1.22, and the goods are substitutes.

d. -1.22, and the goods are complements.

23. Supply of good is likely to be steeper (that is, more inelastic)

a. if sellers can cheaply make more units of the good on short notice.

b. in the long run.

c. in the short run.

d. if sellers have a large degree of flexibility to expand factory size.

24. When the price of a barrel of oil is $35, an oil fracking company is willing to produce 500 gallons per minute. If the price increased to $45, the company would be willing to produce 2500 gallons per minute. Using the midpoint method, calculate the company's price elasticity of supply.

a. approximately 1.33

b. 0.25

c. approximately 5.33

d. approximately 0.188

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ECON 1000 Lecture Notes - Lecture 3: Marginal Cost, Complementary Good, Economic Equilibrium

ECON 1000 Full Course Notes

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