Demand
Explain how the substitution effect and income effect contribute to the downward-sloping demand curve
The substitution effect = consumers switch to relatively cheaper goods
The income effect = a lower price increases real income, allowing more consumption
Describe how an improvement in technology affects the supply curve of a product.
A rightward shift in the supply curve, indicating an increase in supply.
Define cross-price elasticity of demand and explain what a positive value indicates.
Cross-price elasticity of demand is a measure of how the quantity demanded of one good changes in response to a change in the price of another good, and ositive value indicates that the two goods are substitutes
Define consumer surplus and explain how it is represented on a supply and demand graph.
The area below the demand curve and above the market price.
What is a quota, and how does it affect domestic producers and consumers?
A quota is a legal limit on imports that raises prices, benefits domestic producers, but reduces consumer surplus.
If a consumer's income increases, and they buy more of Good X. What type of good is Good X, and why?
The good is a normal good, because demand increases as income increases
Explain the impact of a per-unit tax on the supply curve and the equilibrium price and quantity.
A leftward shift in the supply curve raises the equilibrium price and reduces quantity.
If the income elasticity of demand for a good is negative, what does this imply about the good?
If the income elasticity is negative, the good is an inferior good, since demand decreases as income increases.
What happens to producer surplus when the market price increases? Illustrate with a graph.
Producer surplus increases as sellers receive a higher price than before
Explain how a tariff impacts the domestic market for an imported good, including effects on prices and quantities.
A tariff increases prices, reduces the quantity of imports, benefits domestic producers, but creates deadweight loss.
Differentiate between a change in quantity demanded and a change in demand, providing examples of each.
A change in quantity demanded is due to a price change (movement along the curve), while a change in demand is due to non-price determinants (shift of the curve), like income or preferences.
How do expectations of future prices influence current supply decisions? Provide an example.
A decrease in current supply if producers expect prices to rise in the future.
Compare the price elasticity of demand for luxury goods versus necessity goods, and explain the reasoning.
Luxuries tend to be more elastic due to being non-essential and having more substitutes, while necessities are inelastic.
Explain how a binding price ceiling creates a shortage in the market.
The quantity demanded exceeds the quantity supplied, creating a shortage
Describe the concept of deadweight loss and how it relates to government interventions like taxes or subsidies.
Deadweight loss is the loss of total surplus due to market distortion, like a tax or subsidy.
How do expectations of future price changes affect current demand? Provide a scenario illustrating this effect.
Current demand will increase due to expected future price increases (e.g., people buy more gas today if they expect prices to rise tomorrow)
Analyze the effect of a natural disaster on the supply curve of agricultural products.
A leftward shift in supply, a decrease in supply, and a rise in prices.
How does the availability of close substitutes affect the price elasticity of demand for a product?
A higher number and closeness of substitutes increase price elasticity, making consumers more responsive to price changes
Analyze the effects of a binding price floor on consumer surplus, producer surplus, and deadweight loss.
Consumer surplus will decrease, producer surplus may rise, but overall there is deadweight loss due to inefficient allocation
Analyze the effects of a subsidy on the supply curve, equilibrium price, and quantity.
A subsidy will cause a rightward shift in supply, lowering price, increasing quantity, and increasing consumer surplus (but also increasing government spending).
Using a demand schedule, calculate the price elasticity of demand between two price points and interpret the result.
Qd goes from 100 to 80
Price goes from $10 to $12
Price elasticity of demand= (-20/100)/(2/10) = -2 Thus, elastic.
Given a supply schedule, calculate the price elasticity of supply between two price points and interpret the result.
Qs went from 200 to 260
Price went from $4 to $5
Price elasticity of supply = (60/200)/(1/4) = 1.2 This is elastic supply.
A firm observes that a 10% increase in price leads to a 15% decrease in quantity demanded. Calculate the price elasticity of demand and classify the demand as elastic, inelastic, or unit elastic.
PED = -15% / 10% = -1.5, so demand is elastic
Given a supply and demand diagram, identify the areas representing consumer surplus, producer surplus, and deadweight loss after a price control is implemented.
Consumer surplus (area above price and below demand), producer surplus (below price and above supply), deadweight loss (area between S and D curves due to inefficiency from the price control)
Using a graph, illustrate the impact of a tariff on international trade, showing changes in consumer surplus, producer surplus, government revenue, and deadweight loss.
Tariff raises price, decreases imports, consumer surplus falls, producer surplus increases, government earns revenue, and deadweight loss appears.