Demand
What does a downward-sloping demand curve show?
Inverse relationship between price and quantity demanded.
Why is the supply curve upward sloping?
Higher prices incentivize more production.
What does the price mechanism do?
Allocates resources.
What does inelastic demand imply about consumer response?
Low responsiveness in quantity demanded to changes in price.
What is market failure?
Inefficient allocation of resources.
What is the difference between a movement and a shift in demand?
Movement = price change; shift = non-price factor change.
Explain how a subsidy affects production decisions.
Lowers costs -> increases supply.
Alternative explanation: artificially raises prices, incentivizing more production.
Explain how prices signal scarcity.
Higher prices indicate limited supply.
Why are necessities price inelastic?
Few substitutes, essential consumption.
Why are public goods underprovided?
Free rider problem.
Give TWO non-price determinants of demand.
Income / tastes / expectations / price of related goods / number of consumers.
How does improved technology affect supply?
Increases efficiency -> rightward shift
Why do shortages lead to price increases?
Excess demand pushes price upward.
Explain why firms care about elasticity when pricing goods.
Affects revenue when prices change.
Explain why negative externalities lead to overproduction.
Social costs ignored by firms.
Explain the substitution effect.
When the price of a good rises, consumers are expected to switch to the relatively cheaper good.
Explain how expectations of higher future prices affect current supply.
Supply decreases now (firms hold stock)
What does producer surplus represent?
The extra benefit producers receive beyond the price they were willing to sell at. Basically, "extra" benefit.
How does time affect elasticity of demand?
More time -> more elastic (adjustment possible).
How does a tax correct negative externalities?
Increases costs -> reduces output.
How would expectations of future price increases affect current demand?
Demand increases now (rightward shift).
Give TWO reasons why the supply of primary goods is less responsive than manufactured goods.
Limited flexibility, time constraints, natural factors
What are TWO ways the price mechanism can fail to allocate resources efficiently.
Externalities, inequality, lack of public goods.
Why do governments tax inelastic goods?
Raises revenue with small quantity reduction.
Evaluate one limitation of government intervention.
Information gaps / unintended consequences.