Other things being equal, as price falls, the quantity demanded rises and as price rises, the quantity demanded falls. What is this inverse relationship

is called?

law of demand

What is the schedule or curve called which represents the willingness of

buyers in a specific period to purchase a particular product at each of various

prices?

demand

What is it called when a buyer of a product, in a specific time period, derives less satisfaction

from each successive unit?

diminishing marginal utility

What are the five basic determinants of demand?

(1) Consumer’s tastes (preferences);(2) number of buyers; (3) consumer’s incomes; (4) prices of related goods;

(5) consumer expectations

What are products called whose demand varies directly

with money income?

Superior, or normal goods

How will a decrease in raw materials effect the equilibrium price and quantity in a market?

Equilibrium price will increase and quantity will decrease

A good or service whose consumption declines as income rises, prices held

constant is called?

An inferior good

A good that can be used in place of another good is called?

(an increase in price will increase demand for the other,

and vice versa.)

A substitute good

A good used together with another good (typically,

demanded jointly) is called?

A complementary good

According to the law of supply, when price rises what will

happen to the quantity being supplied?

Supply rises

What is the price where the intentions of buyers and sellers match (the price where quantity

demanded equals quantity supplied)?

Equilibrium price

What is the result when the production of a good is done

in the least costly way?

productive efficiency

What is it called when the output of each product at its marginal

cost and price or marginal benefit are equal, and at which the sum of

consumer surplus and producer surplus is maximized?

allocative efficiency

When the government sets the maximum legal price a seller may charge for a product or service this

is called what?

A price ceiling

What is it called when a minimum price is fixed by the government?

A price floor

The responsiveness of consumers to a change in

price is called______.

Price elasticity of demand

What is the formula for the coefficient of price elasticity of demand (Ed)? How do you

change it for supply (Es)?

% Change in QD

÷% Change in P

For supply just substitute QS for QD

What formula describes the “midpoints method” of calculating Ed or Es?

Q2-Q1/((Q1+Q2)/2)

÷P2-P1/((P1+P2)/2)

Usually expressed as absolute value

When does Ed tell us demand is elastic? Unitary

elastic? Inelastic?

Ed > 1 means elastic

Ed = 1 means unitary elastic

Ed < 1 means inelastic

What is unit elastic really mean?

That a change in price will result in a corresponding

change in demand%ΔQD = %ΔP

What does an Ed = 0 mean? What about Ed = ∞?

Ed = 0 means demand is perfectly inelastic (think diabetics and

insulin)

Ed = ∞ demand is perfectly elastic

Total revenue (TR) is determined by multiplying the product price by

what?

Quantity sold TR = P x Q

How do you use the total revenue (TR) test to determine elasticity?

When TR is moving the same direction as price demand is inelastic, when TR is moving opposite direction from price

demand is elastic

Following the TR Test – what will happen to TR if price is

lowered and demand is inelastic? Demand is elastic?

TR will fall if demand is inelastic

TR will rise if demand is elastic

Identify three of the primary detrminants of price elasticity of demand.

substitutability, price as proportion of income,

luxuries vs. necessities, time

What impact does substitutability have on price

elasticity of demand?

More subsitutes = more elasticity

What impact does price as proportion of income have

on price elasticity of demand?

The higher the price relative to income, the higher the elasticity for that good for

that consumer

What impact does luxury v. necessity have on price elasticity of demand?

Luxuries are more elastic, necessities more inelastic

What does the degree of price elasticity of supply depend on?

How easily producers can shift resources between alternative

uses.

What impact does time have on price elasticity of

demand?

Given more time to make decisions and for markets

to move, elasticity increases

What impact would overly large crop yields likely have

on TR?

Prices would be supressed reducing TR, which is why gov’ts often seek to limit

production

Products with inelastic demand, so that the taxes don’t adversely effect QD

What kinds of products does the government place excise

taxes on? Why?

Depending on the industry, it can take suppliers a while to react to changing prices

Why is the market period so important to elasticity of

supply?

What are the primary differences between short

run and long run?

Short run: not enough time to change major resources related to production (land, machinery, factories, etc.) Long run allows

for this and entry/exit of competitors

What measures the sensitivity of changes in

demand of one good with the price of another (usually

related) good?

Cross elasticity of demandExy = %ΔQD product x ÷

%ΔP of product y

How can Exy help identify substitutes and

complementary goods?

Substitutes have positive Exy

Complements have negative Exy

Income elasticity of demandEi = %ΔQD ÷

%Δ income

What measures the degree to which consumers respond to a change in their income by buying more or less of a

good?

What can Ei help identify normal and inferior goods?

Normal goods have positive Ei

Inferior goods have negative Ei

If a consumer goes out shopping for a cell phone and expects to

spend $250, but finds that the cell phone is on sale for $150? What

do economists call this $100 “savings”?

consumer surplus

Improvements in technology allows firms to produce units of

output with fewer resources causing the supply to increase or

decrease?

increase

What effect does time have on the elasticity of a product?

More time for a consumer to react and make decisions =

elastic