Prices & Markets
In a market economy, prices act as _____ signals
Communication signals between buyers and sellers
What are the two main characteristics of demand?
Desire and ability to buy a good or service
At which stage does diminishing returns begin?
Stage II of production
Which product is more inelastic: gasoline or luxury shoes?
Gasoline
A graph showing the quantity demanded at every possible price
Demand curve
Equilibrium is reached when what two forces are balanced?
Quantity supplied and quantity demanded
Changes in price and quantity demanded have a(n) _____ relationship
Inverse relationship
When is the maximum profitable number of workers most apparent?
At the end of Stage II (when marginal returns start falling)
What test do economists use to measure elasticity?
Total revenue test
Additional satisfaction from consuming one more unit
Marginal utility
The opposite of a surplus
Shortage
A hungry man pays a high price for food but not after eating
Diminishing marginal utility
Change in total income from one more unit sold
Marginal revenue
To estimate elasticity, compare the % change in price to the % change in _____
Total revenue (or quantity demanded)
Products used together, like coffee & cream
Complements
Effect of a bumper crop on price levels
Prices fall due to increased supply
What causes movement along a demand curve rather than a shift?
A change in price only
Term associated with machines and capital goods
Capital
If a firm’s total revenue drops after raising prices, is demand elastic or inelastic?
Elastic
Products that replace one another, like butter & margarine
Substitutes
What do price ceilings and floors prevent?
Prices from reaching equilibrium levels
New homes built near a grocery store—what happens to the store’s demand and why?
Demand increases because there are more consumers nearby
Which inputs can be added to determine total costs?
Fixed costs + variable costs
What does it mean if a good is elastic vs inelastic?
Elastic = quantity changes more than price; Inelastic = quantity changes less than price
Government payment encouraging or protecting an activity
Subsidy