Review of Microeconomics: Demand, Supply and Prices 1. Write answers to the following without looking them up or asking anyone else. 2. Correct or add to your answers as we go over them.

1. Explain in detail.

1. Answer a. This is a demand curve. b. Price is on the vertical axis, quantity on the horizontal. c. The curve slopes downward. d. At higher prices less is demanded; at lower prices more is demanded. e. Price and quantity demanded have an INVERSE relation. f. Consumers prefer lower prices.

2. Explain in detail.

2. Answer a. This is a supply curve. b. The curve slopes upward. c. At lower prices less is supplied; at higher prices more is supplied. d. Price and quantity supplied have a DIRECT relation. e. Suppliers prefer higher prices.

3. Explain $ $95525 $90500 $85475 $80450 $75425 $70400 $65375

3. Answer a. This is a supply schedule. b. At lower prices less is supplied; at higher prices more is supplied. c. Price and quantity supplied have a DIRECT relation.

4. Explain $ $ $ $ $ $ $ $

4. Answer a. This is a demand schedule. b. At higher prices less is demanded; at lower prices more is demanded. c. Price and quantity demanded have a INVERSE relation.

5. Explain.

5. Answer a. The demand and supply curves meet at the equilibrium price. b. This is the price that should be charged by suppliers. c. The equilibrium quantity (the quantity sold) is the greatest possible at any price.

6. Explain what happens at the price shown.

6. Answer a. Since the price is too high, less is demanded than at the equilibrium, and more is supplied. b. This results in a surplus. c. To reduce or eliminate the surplus, suppliers must lower both the quantity supplied and the price.

7. Explain what happens at the price shown.

7. Answer a. Since the price is too low, less is supplied than at the equilibrium, and more is demanded. b. This results in a shortage. c. To reduce or eliminate the shortage, suppliers must increase both the quantity supplied and the price.

8. Explain diminishing marginal utility.

8. Answer Whenever a person consumes consecutive units of a product, enjoyment of each unit (the marginal utility) will be less than that of the previous unit.

9. Explain the effect of diminishing marginal utility on demand.

9. Answer a. Because of diminishing marginal utility, only a certain number of units will be justified by the current price. b. Therefore, consumers will only buy more if the price is lowered.

10. Explain. Also, what can make this happen? What cannot make this happen?

10. Answer a. This is a change in demand, specifically an increase in demand. b. A new quantity is demanded at every price – in this case a higher quantity. c. There would also be a new demand schedule. d. Causes: Changes in consumer income, consumer taste, price of related products, consumer expectations, or population. e. Never a cause: Price, and supply.

11. For each category, give an example that would change the demand for iPods.

11. Possible answers a. Consumer income – Jobs are created at a local auto plant. (increase in demand) b. Consumer taste – the Zune becomes the new trend. (decrease in demand) c. Price of related product – free music downloads now available. (increase in demand) d. Consumer expectations – consumers expect iPods to be cheaper in three months. (decrease in demand) e. Population – millions of people move from US to Bangladesh. (decrease in demand)

12. Explain. Also, what can make this happen? What cannot make this happen?

12. Answer a. This is a change in supply, specifically a decrease in supply. b. A new quantity is supplied at every price – in this case a lower quantity. c. There would also be a new supply schedule. d. Causes: Changes in cost of inputs, taxes or subsidies, gov. regulations, productivity, technology, number of sellers, or producer expectations. e. Never a cause: Price, and demand.

13. For each category, give an example that would change the supply for iPods.

13. Answer a. Cost of inputs – pay raise for iPod assembly workers. (decrease in supply) b. Taxes/subsidies – sales tax decrease. (increase in supply) c. Gov. regulations – all iPods must be inspected for proper functioning. (decrease in supply) d. Productivity – effective new training for iPod workers. (increase in supply)

13. Possible Answers, cont. e. Technology – assembly machinery breaks down. (decrease in supply) f. Number of sellers – Best Buy stops selling iPods. (decrease in supply) g. Producer expectations – Suppliers expect iPods to be cheaper in three months. (increase in supply)

14. Explain. Also, what can make this happen? Is there anything else that can make this happen?

14. Answer a. This is a change in quantity demanded, specifically an increase in quantity demanded. b. The new quantity is ONLY because of a new price.

15. Explain the income effect. How is it different from a change in consumer income?

15. Answer a. It is one explanation for a change in quantity demanded. b. When the price of a product decreases, consumers’ money goes further toward buying that product, or vice-versa. c. A change in consumer income causes a change in demand, and gives people more/less money to buy all products.

16. Explain the substitution effect. How is it different from a change in price of a substitute?

16. Answer a. It is the other explanation for a change in quantity demanded. b. When the price of a product decreases, consumers who were buying a substitute may now switch to that product, or vice-versa. c. A change in price of a substitute causes a change in demand, and causes people who were buying the original product to switch to/from the substitute no matter what the price of the original product.

17. Explain. Also, what can make this happen? Is there anything else that can make this happen?

17. Answer a. This is a change in quantity supplied, specifically a decrease in quantity supplied. b. The new quantity is ONLY because of a new price.

18. Explain. What caused the new price? What happened because of the new price?

18. Answer a. Less will now be sold at a lower price. b. Cause: decrease in demand. c. Result: decrease in quantity supplied.

19. Explain. What caused the new price? What happened because of the new price?

19. Answer a. Less will now be sold at a higher price. b. Cause: decrease in supply. c. Result: decrease in quantity demanded.

20. For each, what happens to the quantity sold? For each, what happens to price? a. Increase in demand b. Increase in supply c. Decrease in demand d. Decrease in supply

20. Answers a. More will be sold at a higher price. b. More will be sold at a lower price. c. Less will be sold at a lower price. d. Less will be sold at a higher price.

21. Refer to the events you wrote for question #11. a. Which events would increase both the price and the quantity sold? b. Which events would increase the price but decrease the quantity sold? c. Which events would decrease the price but increase the quantity sold? d. Which events would decrease both the price and the quantity sold?

21. Answers a. Any event that increases demand. b. None. c. None. d. Any event that decreases demand.

22. Refer to the events you wrote for question #13. a. Which events would increase both the price and the quantity sold? b. Which events would increase the price but decrease the quantity sold? c. Which events would decrease the price but increase the quantity sold? d. Which events would decrease both the price and the quantity sold?

22. Answers a. None. b. Any event that decreases supply. c. Any event that increases supply. d. None.

23. Explain the difference.

23. Answer a. The curve on the left is inelastic, since it is steep. b. It shows that quantity demanded does not respond much to a price change. c. The curve on the right is elastic, since it is not steep. d. It shows that quantity demanded responds significantly to a price change.

24. Explain how to estimate elasticity of demand.

24. Answer a. Can purchase be delayed? (usually yes for reusable items) b. Are there adequate substitutes available? (usually yes for reusable items) c. Is a large portion of income required? d. 2-3 answers of yes means elastic. e. 2-3 answers of no means inelastic.

25. What happens to demand elasticity in a specific (rather than general market)?

25. Answer a. All products have elastic demand in a specific market, as long as there is somewhere else to go. b. It is only in the general market that the three questions must be used to determine elasticity of demand.

26. Explain how to calculate elasticity of demand

26. Answer a. First you need to calculate total receipts (multiply each price by the quantity demanded). Look at total receipts as the price goes down. b. Increasing total receipts = elastic. c. Decreasing total receipts = inelastic. d. No change = unit elastic.

27. Explain how a consumer is affected by demand elasticity.

27. Answer a. Demand elasticity matters whenever there is a change in supply. b. If demand is elastic, price will not change very much. c. If demand is inelastic, price will change significantly.

28. Explain the difference.

28. Answer a. The curve on the left is elastic, since it is not steep. b. It shows that quantity supplied responds significantly to a price change. c. The curve on the right is inelastic, since it is steep. d. It shows that quantity supplied does not respond much to a price change.

29. Explain how to estimate elasticity of supply.

29. Answer a. Most products have elastic supply. b. Any product that cannot easily increase supply has inelastic supply, such as sporting events or parking spaces.

30. Explain how to calculate elasticity of supply.

30. Answer a. Quantity before price; high divided by low. b. (High Quantity ÷ Low Quantity) > (High Price ÷ Low Price): Elastic c. (High Quantity ÷ Low Quantity) < (High Price ÷ Low Price): Inelastic d. (High Quantity ÷ Low Quantity) = (High Price ÷ Low Price): Unit elastic

31. Explain how a consumer is affected by supply elasticity.

31. Answer a. Supply elasticity matters whenever there is a change in demand. b. If supply is elastic, price will not change very much. c. If supply is inelastic, price will change significantly.