Questions on Demand, Supply, Price

What is the law of demand states

As price goes up, demand goes down and as price goes down, demand goes up. This is an INVERSE relationship between price and demand

What is a chart or listing called that shows prices and the quantity demanded at each price?

Demand Schedule

What is a graph of prices and the quantity demanded at each price called?

Demand Curve

What are complementary goods? Name two goods that are complements. What happens if the price of one of the complement goes up?

Answer Goods that go together. Bread – butter Cereal – milk DVD players – DVDs etc. If the price of one goes up demand for it and its complement will likely decrease

What is the substitution effect? Give examples of the substitution effect.

Answer If the price of a good increases people may switch to an available substitute. Or, if the price of a substitute decreases, people may switch to it. As price of hamburgers goes up, consumers will substitute chicken sandwiches instead. If the price of ethanol drops people will switch to it instead of gasoline.

Give 2 factors besides price (non-price factors) that can influence demand for a good.

Consumer taste/preference Market size Prices of related goods Income of consumers Future expectations

Which of the following is a graph of a demand curve and which a supply curve A.B.

A = Supply curve B = Demand Curve

What direction does a demand curve shift to indicate an increase in demand ?

To the right

Elasticity refers to a change (stretch or contraction) in A. Price B. Income C. Quantity D. Marginal Product

Quantity

Which demand curve has a steeper slope? One indicating inelastic demand or one showing demand for a good with elastic demand?

One indicating inelastic demand or one showing

The price of a good decreases, so then people have more money to spend and can buy more of that product increasing demand.

Answer: The income effect

Name one factor that determines whether the demand for a product is elastic or inelastic ?

Is is a necessity or not. If the purchase can be delayed Is it an inexpensive or expensive purchase

Which of the following has elastic demand? a. gasoline b. bread c. tobacco d. candy

d. candy

The law of supply states

As price goes up, supply goes up and as price goes down, supply goes down.

What does it mean when there is an inelastic supply of a good?

Means that suppliers can not increase or change amount of production quickly in response to a change in price or demand

What factors affect whether a product has an inelastic supply

Expensive to produce. Takes a long time to produce Resources are not readily available

What labels go on the vertical and horizontal axis of a demand/supply curve?

Vertical – price Horizontal - Quantity

What is the point or price where the demand curve and supply curve intersect. At this price there will not be a surplus or shortage. Quantity Demanded (QD) will equal Quantity of Supply (QS)

Equilibrium point or price.

The increase in production cost that results when one more unit of input is added. For example adding 1 more worker increases production by 10 units.

Marginal Product

What are the 3 stages of production?

Increasing, Diminishing, Negative What is occurring during each stage of production?

The term for the minimum price that can be charged for a good or service if the government sets price controls.

Price Floor

The term for the maximum that can be charged for a good or service if the government uses price controls.

Price Ceiling

WHICH OF THE FOLLOWING PRODUCTS WOULD MOST LIKELY HAVE AN ELASTIC SUPPLY? A. Real Estate - Houses B. Gold C. Super Bowl T-shirts D. All of the above have elastic supply

SUPERBOWL T-SHIRTS

Give an example of a non- price factor (influence) upon the supply of a product

ANY OF THE FOLLOWING PRICE OF RESOURCES COMPETITION TECHNOLOGY GOVERNMENT – taxes, regulations, subsidies PRODUCER EXPECTATIONS

If a products price is above the equilibrium price what will likely result? A. Surplus A. Surplus B. Shortage B. Shortage

A. Surplus

If the government interferes in the economy by setting a price ceiling and that price is below the equilibrium price what will likely be the result ? A. Shortage A. Shortage B. Surplus B. Surplus C. Huge profit C. Huge profit

A.Shortage Reason - Producers will not increase supply due to the price ceiling.

How is total revenue figured at each price using a demand schedule?

Multiply price times the quantity demanded at that price.

Using the Total Revenue Test (called the total expenditure test in the text) if after a price increase if there is a decrease in total revenue there is A. Inelastic demand at that price B. Elastic demand at that price D. Variable total revenue Clue: demand decreased enough that total revenue decreased from what it was at the previous price.

B. Elastic demand at that price

What are fixed costs? Give an example of a fixed cost.

Costs that do not change from month to month. Also called overhead. Leases Rent or Mortgage Insurance

What are expenses that may change from month to month called?

Variable costs