Basic Econ Principles
What is the relationship between price and quantity demanded according to the Law of Demand?
Inverse relationship: as price rises, quantity demanded falls, and vice versa.
A new scientific study says blueberries significantly improve memory. What happens to the demand for blueberries?
Demand increases; the curve shifts right because of tastes/preferences.
Where must a binding price ceiling be located relative to equilibrium?
Below equilibrium
If PED is 0.6, is demand elastic, inelastic, or unit elastic?
Inelastic
If the world price of a good is below the country's domestic equilibrium price, will the country import or export the good?
Import
What does ceteris paribus mean when economists analyze a demand or supply curve?
All things being equal
Pepsi and Coke are substitutes. The price of Pepsi increases. What happens to the demand for Coke?
Demand for Coke increases; its demand curve shifts right
A binding price floor is imposed on corn. Does it create a shortage or surplus?
Surplus
Price increases by 20% and quantity demanded decreases by 30%. Calculate PED and classify demand.
PED = 1.5; elastic.
When an importing country opens to free trade at a lower world price, what happens to domestic consumer surplus and domestic producer surplus?
Consumer surplus increases; producer surplus decreases.
At a price of $8, Qd = 40 and Qs = 70. Identify the market condition and state what will happen to price in a competitive market.
Surplus of 30 units; sellers will lower price toward equilibrium.
The government gives electric-vehicle manufacturers a per-unit subsidy. What happens to the supply of electric vehicles?
Supply increases; the supply curve shifts right.
A $4 per-unit excise tax is placed on producers. What does the $4 represent on the supply-and-demand graph?
The price consumers pay and the price producers receive.
Consumer income increases by 10%, while quantity demanded of instant noodles decreases by 15%. Calculate YED and classify the good.
YED = −1.5; inferior good
At the world price, domestic consumers demand 100 units while domestic firms supply 40 units. How many units are imported?
60 units.
A buyer is willing to pay $90 for a product but purchases it for $65. The seller was willing to accept $50. Calculate consumer surplus and producer surplus.
CS = $25; PS = $15.
Smartphones are normal goods. Consumer incomes increase at the same time that a new manufacturing technology lowers production costs. What can you definitely say about equilibrium quantity? What about equilibrium price?
Quantity increases; price is indeterminate.
Demand is relatively inelastic and supply is relatively elastic. Who bears the larger share of an excise tax, and why?
Consumers, because the relatively more inelastic side of the market changes quantity less and therefore bears more of the tax burden.
The price of coffee increases by 25%, and quantity demanded of tea increases by 50%. Calculate XED and identify the relationship between coffee and tea.
XED = +2.0; substitutes.
Under free trade, Pw = $10, Qd = 100, and Qs = 40. A $4 tariff raises the domestic price to $14, where Qd = 80 and Qs = 50. Calculate imports before the tariff, imports after the tariff, and government tariff revenue.
Before: 60 imports. After: 30 imports. Tariff revenue = $4 × 30 = $120.
A market has an equilibrium price of $20 and equilibrium quantity of 50. At a price of $15, Qd = 70 and Qs = 30. Explain the market adjustment that will occur and why.
There is a shortage of 40. Sellers raise price; as price rises Qd falls and Qs rises
In the market for beef, consumer preferences shift away from beef at the same time cattle-feed prices increase. Determine what definitely happens to equilibrium quantity and what happens to equilibrium price.
Quantity definitely decreases; price is indeterminate because demand decreases while supply also decreases.
Before a tax, equilibrium price is $10. After a tax, consumers pay $13, producers receive $8, and 60 units are sold. Calculate the tax per unit, total government tax revenue, the amount of the tax paid per unit by consumers, and the amount paid per unit by producers.
Tax = $5; tax revenue = $300; consumers pay $3/unit; producers pay $2/unit.
A firm's product has elastic demand. The firm raises its price from $20 to $25. Explain what must happen to total revenue and why, using the Total Revenue Test.
Total revenue decreases because with elastic demand the percentage decrease in Qd is proportionally greater than the percentage increase in price; price and TR move in opposite directions.
Explain the complete effect of a tariff on an importing country: what happens to consumers, domestic producers, government, imports, and total surplus?
Consumers lose CS; domestic producers gain PS; government receives tariff revenue; imports decrease; total surplus falls because two DWL triangles are created.