Markets & Competition
When a gas station raises prices above the going rate and loses customers to nearby competitors, this real-world outcome demonstrates what market characteristic?
High competition and price sensitivity — The inability of one firm to influence price shows a perfectly competitive market.
Gasoline prices rise by 25%, and people start carpooling or biking to work. What economic law does this behavior illustrate?
The law of demand — As price increases, quantity demanded decreases because opportunity cost rises.
A new oil refinery lowers gasoline production costs. Describe the expected shift in the market supply curve and its effect on equilibrium price.
Supply curve shifts right; equilibrium price falls — Lower production costs increase supply and reduce price.
A company raises prices by 10% and sees a 30% drop in sales. Is its demand elastic or inelastic, and how will total revenue change?
Elastic demand; total revenue decreases — A large drop in quantity outweighs the price increase.
A city sets rent caps to make housing affordable. What unintended long-term effect might occur in housing quality and availability?
Housing shortages and deterioration — Landlords reduce maintenance and new construction declines.
In a perfectly competitive market, what happens when a single seller tries to raise their price while all others keep theirs constant?
They lose all customers — Buyers switch to competitors since identical products are available at lower prices.
A city introduces free public transportation, reducing car fuel purchases. What happens to the demand curve for gasoline?
The demand curve shifts left — Public transit reduces overall demand for gasoline at all price levels.
Wildfires destroy farmland, making crops harder to produce. How will this affect the equilibrium quantity and price of wheat?
Supply decreases; equilibrium price rises, quantity falls — Fewer crops mean scarcity and higher prices.
Gasoline demand reacts little to price changes in the short run but more in the long run. Which elasticity factor explains this difference?
Time horizon — Consumers adjust behavior more over time, making long-run elasticity higher.
When Congress raises the minimum wage above equilibrium, what happens to the labor market in terms of supply and demand?
Labor surplus (unemployment) — Higher wage floors cause quantity of labor supplied to exceed demand.
Suppose new technology makes it easier for buyers to compare prices online. How does this affect market competitiveness?
Market efficiency and transparency increase — Easier comparison intensifies competition and narrows price differences.
After an economic downturn, households cut spending on dining out but increase instant noodle purchases. Which are normal goods, and which are inferior?
Dining out = normal good; instant noodles = inferior good — Normal goods rise with income, inferior goods rise when income falls.
When the government releases strategic oil reserves, why might prices fall even though demand stays the same?
Increased supply lowers prices — The added oil increases market supply without changing demand.
Why might the price elasticity of demand for Pepsi be higher than for “soft drinks” as a whole?
Narrower market definition — Pepsi has many substitutes, while “soft drinks” as a whole have fewer.
A new tax on sugary drinks shifts the supply curve upward by $0.10 per can. Who bears more of the tax burden if demand is inelastic?
Consumers bear more of the burden — When demand is inelastic, buyers absorb most of the tax through higher prices.
Why do economists often study perfectly competitive markets even though few exist in reality?
It provides a baseline for comparison — Perfect competition acts as a theoretical model for understanding real-world deviations.
Airline ticket prices drop significantly, and fewer people drive long distances. How are these two goods related?
They are substitutes — A lower price for air travel reduces demand for driving.
If the price of gasoline is set below equilibrium, what short-term consumer experience often results?
Shortages — Below-equilibrium prices cause excess demand and long waiting lines.
If supply is perfectly inelastic, what happens to producer revenue when the government adds a tax?
Producer revenue doesn’t change — With perfectly inelastic supply, producers bear the entire tax burden.
Robinson can gather coconuts with less sacrifice of fish than Crusoe. Even though Crusoe is more productive overall, why does it still make sense for them to trade?
Comparative advantage — Robinson’s lower opportunity cost for coconuts allows both to benefit by specializing and trading.
In a local farmers’ market, if both sellers and buyers are well informed, what happens to the accuracy of price signals?
Prices reflect true market value — Accurate information ensures efficient allocation and communication between buyers and sellers
A popular influencer promotes electric cars for environmental reasons. What non-price determinant of demand is changing here?
Change in consumer tastes or preferences — Environmental concerns or trends can shift demand for certain products.
Imagine a market in equilibrium. If demand suddenly increases, why does the price rise before producers can expand supply?
Temporary disequilibrium — Prices rise to signal producers to expand supply until a new equilibrium is reached.
Farmers adopt a new technology that increases output but lowers market prices. Using elasticity, explain why some farmers still lose income.
Inelastic demand leads to lower revenue — Price falls more than demand rises, reducing total income despite efficiency gains.
When countries specialize based on comparative advantage and trade freely, what happens to total global output and individual welfare?
Total output increases and both gain — Specialization and trade raise efficiency and improve overall welfare.