Chapter 1 & 2
10 Economic Principles
Think Like an Economist
10 Economic Principles
Think Like an Economist
Answer: If a city bans smoking in public places to reduce secondhand smoke, it is addressing this type of market failure.
Question: What is an externality?.
A market with only one seller that controls price and output.
A: What is a monopoly?
Answer： This is the term for how much quantity demanded responds to a change in price.
QuestionWhat is price elasticity of demand?
This measures how much quantity demanded changes when price changes.
A: What is price elasticity of demand?
Answer: A tax on buyers shifts this curve in this direction.
Question: What is the demand curve shifts left (downward)?
Answer: When consumers’ tastes shift in favor of electric vehicles, the change in the market is best described as this.
Question: What is a rightward shift in demand?
Answer: If quantity demanded changes proportionately more than price, demand is classified this way.
Question: What is elastic?
Answer: Free markets allocate goods to buyers who have the highest value, measured by this concept.
Question: What is willingness to pay?
Answer: In the circular flow, wages paid to workers are part of this flow.
Question: What is the flow of income (money)?
A situation in which quantity demanded is greater than quantity supplied.
A: What is a shortage?
ANSWER： A firm increases its price from $700 to $800, but TR falls from $420,000 to $400,000. What is the elasticity range?
QUESTION: What is elastic (|Ed| > 1)?
Price ↑ → TR ↓ → demand is elastic
Demand with elasticity exactly one has this name.
A: What is unit elastic demand?
Answer: When demand is more elastic than supply, the burden of a tax falls primarily on this group.
Question: Who are producers (sellers)?
Answer: If the price of a good rises and firms produce more, this change is represented as this on the supply curve.
Question: What is a movement upward along the supply curve?
Answer: Gasoline demand is more elastic in the long run than in the short run because consumers can do this over time.
Question: What is adjust behavior (switch cars, move closer, change habits)?
Answer: Free markets allocate production to sellers who can produce at the lowest level of this.
Question: What is cost?
Answer: An airline selling a last-minute seat below average cost can still profit because this cost is relatively small.
Question
The claim that, other things equal, as price rises, quantity demanded falls.
A: What is the law of demand?
ANSWER：A vertical demand curve represents this type of elasticity.
Question: What is perfectly inelastic?
A necessity with no substitutes tends to have this kind of price elasticity of demand.
A: What is inelastic demand?
Answer: A tax creates a difference between the price buyers pay and sellers receive, known as this concept.
Question: What is a tax wedge?
Answer: When market price is below the equilibrium, buyers compete for scarce goods, and this mechanism pushes the price back toward equilibrium.
Question: What is shortage-driven bidding up of prices?
Answer: If price rises and total revenue falls, this must be true about the price elasticity of demand.
Question: What is demand is elastic (elasticity > 1)?
Answer: When a policy prevents some mutually beneficial trades, the lost gains from trade are called this.
Question: What is deadweight loss?
Answer: The study of economy-wide phenomena such as inflation and unemployment.
Question: What is macroeconomics?
ANSWER：Goods for which demand increases when income rises.
Question: What are normal goods?
ANSWER：Using the midpoint formula, calculate Ed when the price increases from $10 to $12, and the quantity demanded falls from 10 to 8.
Answer: What is 1.22 (elastic)?
%ΔQ = (10 - 8) / ((10 + 8)/2) = 2/9 = 0.222
%ΔP = (12 - 10) / ((12 + 10)/2) = 2/11 = 0.182
Ed = 0.222 / 0.182 ≈ 1.22 (elastic)
Over this horizon, demand becomes more elastic as buyers adjust.
A: What is the long run?
Answer: If the equilibrium price is $35 and a price ceiling is set at $30, this type of constraint exists and leads to this market outcome.
Question: What is a binding price ceiling causing a shortage?
Answer: To analyze how any event affects a market, economists follow three steps: identify which curve shifts, determine direction, and then do the final step.
Question: What is compare the new equilibrium with the old equilibrium?
Answer: If a 10% increase in price leads to only a 5% decrease in quantity demanded, demand is classified this way.
Question: What is inelastic?
Answer: The policy of leaving markets alone because they maximize total surplus is known by this French term.
Question: What is laissez-faire?
Answer: A statement that describes the world as it is, such as “higher taxes reduce consumption.”
Question: What is a positive statement?
ANSWER：When a change in price causes movement along the demand curve, it is called this.
Question: What is a change in quantity demanded
ANSWER：As the price rises from $10 to $12, Q falls from 10 to 9. What is |Ed| using the midpoint formula?
Answer: What is 0.58
calculated as:
Q falls from 10 to 9 → %ΔQ = 1/9.5 = 0.105
P rises from 10 to 12 → %ΔP = 2/11 = 0.182
Ed = 0.105 / 0.182 = 0.58 (rounded from 0.577)
By formula, price elasticity of demand equals this ratio of percentage changes.
A: What is (%ΔQd) / (%ΔP)?
Answer: When a tax is imposed, both buyer price rises and seller price falls, causing this effect on the equilibrium quantity.
Question: What is quantity decreases (market shrinks)
Answer: When the market price is above equilibrium, unsold goods accumulate, creating this condition and putting downward pressure on price.
Question: What is a surplus?
Answer: A perfectly inelastic demand curve has this shape and this elasticity value.
Question: What is a vertical curve and elasticity = 0?
Answer: In equilibrium, goods are allocated to buyers with the highest willingness to pay and sellers with the lowest costs because of this mechanism.
Question: What is the price system (market equilibrium)?
Answer: A bowed-out PPF reflects this economic idea about resources.
Question: What is increasing opportunity cost?
Answer: A situation in which the quantity supplied is greater than the quantity demanded.
Question: What is a surplus?
Question: Demand when the total revenue increases when the price falls.
Answer: What is elastic demand, |Ed|> 1.0?
Answer: When a tax is imposed on buyers instead of sellers, the equilibrium quantity and tax burden remain unchanged because of this economic principle.
Question: What is tax incidence is independent of who the tax is levied on?
Using Qd = 100 – 2P and Pe = 18, what is the consumer surplus at equilibrium?
What is consumer surplus = $1,024?
The maximum price consumers are willing to pay (P-intercept) is P = 50
Equilibrium price (Pe) = 18
Equilibrium quantity (Qe) = 64
Consumer Surplus = ½ × base × height
= ½ × 64 × (50 – 18) = 32 × 32 = $1,024
Answer: If the price of a good rises and firms respond by producing more, this reflects this economic principle.
Question: What is the law of supply?
Answer: If the price elasticity of supply is greater than 1, producers respond to price changes this way.
Question: What is strongly (elastic supply)?
Answer: When a technological improvement lowers production costs, total surplus changes in this direction and is composed of these components.
Question: What is total surplus increases (CS rises and PS may rise or fall)?
Answer: “The government should reduce inflation” is an example of this.
Question: What is a normative statement?
ANSWER：When prices are above equilibrium, sellers reduce this until markets clear.
Question: What is price?
Answer: When soda (|Ed| = 0.8) is more elastic than Coca-Cola or Pepsi (|Ed| = 3.3)
Question: What is soda has fewer substitutes than specific brands?
With elastic demand, cutting price does this to total revenue.
A: What is increase it?
Answer: If supply is perfectly inelastic, this group bears the entire burden of a tax regardless of statutory incidence.
Question: Who are producers (or the inelastic side of the market)?
Answer: When producers expect higher future prices, they may reduce current supply, causing this change today.
Question: What is a leftward shift in supply?
Answer: When the price of one good increases and demand for another good decreases, the cross-price elasticity between them must be this.
Question: What is negative (they are complements)?
Answer: When engineers invent cleaner technology, the PPF between income and environmental quality shifts in this direction.
Question: What is an outward shift (increase in productive capacity)?
ANSWER：A market with so many buyers and sellers that no single participant can influence price.
Question: What is a competitive market?
Cross-price elasticity is positive for these pairs
A: What are substitutes
Suppose a price ceiling Pc = 12 is imposed. What is the size of the shortage?
What is shortage = 34 units?
Qd = 100 – 2(12) = 76
Qs = 10 + 3(12) = 46
Shortage = 76 – 46 = 30
Answer: When rent control sets prices below equilibrium, apartments become scarce and this outcome emerges.
Question: What is a shortage of housing?
Answer: When the price of coffee rises and demand for tea increases, coffee and tea are classified as this type of relationship.
Question: What are substitutes?
Answer: When the price of concert tickets rises and quantity demanded falls sharply, this type of demand is being demonstrated.
Question: What is elastic demand?
Answer: The inability of a market to allocate resources efficiently on its own.
Question: What is a market failure?
Question: What is a market failure?
Answer: When more firms enter a market, the total supply curve does this.
Question: What is leftward shift right (increase)?
Suppose an excise tax is imposed on insulin. Who bears most of the burden—buyers or sellers?
What is buyers, because demand is perfectly inelastic (Ed = 0)
Over this time horizon, demand becomes more elastic as buyers adjust.
A: What is the long run?
ANSWER：Using Qd = 100 – 2P and Pe = 18, what are
Equilibrium price (Pe) =?
Equilibrium quantity (Qe) = ?
Question: what is
Equilibrium price (Pe) = 18
Equilibrium quantity (Qe) = 64
Answer: If incomes rise and consumers buy more restaurant meals at every price, restaurant meals are this type of good.
Question: What is a normal good?
Answer: If insulin prices rise and quantity demanded changes very little, insulin is classified as this type of good.
Question: What is a necessity with inelastic demand (nearly perfectly inelastic demand)?
Answer: When one firm dominates the market and can influence prices, it is exercising this.
Question: What is market power?
Answer: When both demand and supply increase, the equilibrium quantity must rise, but the equilibrium price depends on this relative factor.
Question: What is which shift is larger (relative magnitude of demand vs supply change)?
A: What are substitutes?
Qd = 100 – 2P and Qs = 10 + 3P, find the equilibrium price (Pe) and quantity (Qe).
What is Pe = 18, Qe = 64?
Set Qd = Qs:
100 – 2P = 10 + 3P
90 = 5P → P = 18
Q = 100 – 2(18) = 64
Answer: When the government sets a minimum wage above equilibrium, the labor market experiences this result.
Question: What is unemployment (labor surplus)?
Answer: A decrease in the price of a good leads to a higher quantity demanded, which is represented graphically by this.
Question: What is a movement down along the demand curve?
Answer: When the price of a good falls and total revenue increases, this must be true about demand.
Question: What is demand is elastic?
A simplified representation showing how households and firms interact in markets for goods and factors.
A: What is the circular-flow diagram?
Answer: If demand increases and supply decreases simultaneously, the equilibrium price will definitely move in this direction, while the quantity is uncertain.
Question: What is upward (price increases)?
If |Ed| > 1, demand is described as this.
What is elastic?
Answer: A $4 tax on buyers shifts demand from P=24−QP = 24 - QP=24−Q to P=20−QP = 20 - QP=20−Q, reducing equilibrium quantity from 9 to 7 and creating this government revenue.
Question: What is $28 in tax revenue?
Answer: A tax on sellers shifts this curve in this direction.
Question: What is the supply curve shifts left (upward)?
Answer: When the price of coffee rises and demand for tea increases, the cross-price elasticity between the two goods is this.
Question: What is positive (they are substitutes)?
Answer: If both equilibrium price and quantity increase, the most likely explanation is this shift in the market.
Question: What is an increase in demand?
Answer: When demand is inelastic, an increase in price causes total revenue to move in this direction because price changes dominate quantity changes.
Question: What is total revenue increases?
Answer: If a price ceiling is set below equilibrium, the difference between quantity demanded and quantity supplied is called this, requiring rationing mechanisms.
Question: What is a shortage?
Answer: When buyers cannot purchase a good due to a binding price ceiling, allocation often occurs through this non-price mechanism.
Question: What are waiting lines or rationing?
Answer: When prices increase, leading to proportionally equal decreases in quantity demanded, this happens to total revenue.
Question: What is it remains unchanged?
Answer: If the equilibrium price falls while the equilibrium quantity rises, the most likely cause is this market change.
Question: What is an increase in supply?
Answer: If total revenue does not change when price changes, the price elasticity of demand must be this value.
Question: What is unit elastic (elasticity = 1)
Answer: When a $3 tax increases buyer price from $12 to $14 and lowers seller price to $11, this is the total tax burden on buyers.
Question: What is $2 per unit?
Answer: The side of the market that cannot easily adjust quantity is described as this and bears more tax burden.
Question: What is inelastic?
Answer: A flat demand curve indicates this type of elasticity, while a steep demand curve indicates the opposite.
Question: What is elastic demand (flat) and inelastic demand (steep)?
Answer: If a decrease in the price of a substitute good leads to lower demand for another good, the demand curve for that other good shifts in this direction.
Question: What is leftward
Answer: A good with many close substitutes, a narrowly defined market, and a long time horizon will have this type of demand.
Question: What is highly elastic demand?
Answer: A binding price floor above equilibrium causes quantity supplied to exceed quantity demanded, creating this market outcome often seen in labor markets.
Question: What is a surplus (unemployment)?
Answer: When a price ceiling is above the equilibrium, it has this effect on the market.
Question: What is no effect (non-binding)?
Answer: A product that takes time to produce, like new housing, tends to have this type of supply elasticity in the short run.
Question: What is inelastic supply (perfectly inelastic)?
Answer: A government policy that causes a shortage in a market must have set the price this way relative to the equilibrium.
Question: What is below the equilibrium price (a binding price ceiling)?
Answer: If the price of a good rises by 10% and quantity demanded falls by 20%, the price elasticity of demand equals this value, indicating this type of demand.
Question: What is 2, and demand is elastic?