Economics Textbook Midterm Study

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Economics Textbook Midterm Study
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2014-10-26 23:59:16
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  1. What is Demand?
    The quantity of a good or service that consumers demand depends on price and other factors such as consumer incomes and the prices of related goods.
  2. What is Supply?
    The quantity of a good or service that firms supply depends on price and other factors such as the cost of inputs and the level of technological sophistication used in production
  3. What is Market Equilibrium?
    The interaction between consumers' demand and producers' supply determines the market price and quantity of a good or service that is bought or sold.
  4. What are shocks to equilibrium?
    Changes in a factor that affect demand (such as consumer income) or supply (such as the price of inputs) after the market price and quantity sold of a good or service.
  5. What are effects of Government Interventions?
    Government policy may also affect the equilibrium by shifting the demand curve or the supply curve, restricting price or quantity or using taxes to create a gap between the price consumers pay and the price firms receive.
  6. When do you use the supply and demand model?
    The supply and demand model applies very well to highly competitive markets, which are typically markets with many buyers and sellers.
  7. What is a complement?
    A good that is used with the good under consideration.  i.e. hotdog buns are used with hot dogs.
  8. Does the price of a related good affect a consumers buying decisions?
    Yes... because related goods can be substitutes or compliments.  A substitute is used instead of the good in question, where a compliment is used with the good (i.e. hot dog buns and hot dogs).
  9. What is the quantity demanded?
    The amount of a good that consumers are willing to buy at a given price, holding constant all other factors that influence purchases.  The quantity demanded of a good or service can exceed the quantity actually sold.  I.e. as a promotion, a local store might sell DVDs for $2 each today only.  At that low price you might want ot buy 25 DVDS but the store might run out of them before you can.
  10. A demand curve shows...
    The quantity demanded at each possible price, holding constant the other factors that influence purchases.
  11. What is the law of demand?
    consumers demand more of a good if its price is lower, holding constant income, the prices of other goods, tastes and other factors that influence the amount they want to consume.
  12. What causes a shift of the demand curve?
    Any factor other than cost.  If cost changes, you just move down the line.  If say, income changes, the demand curve physically moves.
  13. The quantity supplied...
    is the amount of a good that firms want to sell at a given price, holding constant other factors that influence a firms supply decisions, such as costs and government actions.
  14. A supply curve shows...
    the quantity supplied at each possible price, holding constant the other factors that influence firms' supply decisions.
  15. When a market is in equilibrium ....... wants to change its behaviour.
    suppliers and buyers DO NOT
  16. at any other price other than the equilibrium price ....
    either consumers or suppliers are unable to trade as much as they want.
  17. The equilibrium price is called
    the market clearing price because there are no frustrated buyers and sellers at this price.
  18. Price ceilings have no effect if
    they are set above the equilibrium price that would be observed in the absence of price controls
  19. What are shocks to the equilibrium?
    A change in an underlying factor other than a goods own price causes a shift of the supply curve or the demand curve, which alters teh equilibrium.  For example, if the price of coffee rises, we ould expect the demand for tea, a substitute to shift outward.
  20. Assume that both the US and the canadian demand curves for lumber are linear.  The canadian demand curve lies inside the US curve, (the canadian demand curve hits the axes at a lower price and a lower quantity than the US curve).    Draw the individual country demand curves and the aggregate demand curve for the two countries.  Explain the relationship between the country and aggregate demand curve in words.
    The market demand curve is the sum of the quantity demanded by individual consumers at a given price.  Graphically, the market demand curve is the horizontal sum of individual demand curves. 
  21. The total US supply curve for frozen orange juice is the sum of the supply curve from Florida and the imported supply curve from Brazil.  In a diagram, show this.
  22. What is elasticity?
    Elasticity measures the responsiveness of one variable, such as quantity demanded, to a change in another variable, such as price.

    Managers commonly summarize the responsiveness of one variable, such as the quantity demanded, to a change in another, such as price, using a measure called elasticity, which is the percentage change in one variable divided by the associated percentage change in the other variable.
  23. What is the price elasticity of demand?
    In making critical decisions about pricing, a manager needs to know how a change in price affects the quantity sold.  The price elasticity of demand is the percentage change in quantity demanded, divided by the percentage change in price.  That is, the price elasticity of demand...

    Percentage change in quantity demanded/percentage change in price.
  24. The elasticity of demand is a ____ number.
    Pure.  It is not measured in any particular unit like dollars or pounds.  A useful way to think about elasticity is to consider the effect of 1% change.  If the price elasticity of demand is -2, a 1% decrease in price would cause quantity demand to increase by 2%.
  25. What is Arc Elasticity?
    Very often, a manager has observed the quantity demanded at two different prices.  THe manager can use this information to calculate an arc price elasticity of demand, which is a price elasticity of demand calculated by two distinct price quantity pairs. 

    In mathematics and economics, the arc elasticity is the elasticity of one variable with respect to another between two given points. It is the ratio of the percentage change of one of the variables between the two
  26. An arc price elasticity is an elasticity that uses the ......... as the denominator for percentage calculations.
    average price and average quantity
  27. What is point elasticity?
    An arc elasticity is based on a discrete change between two distinct price quantity combinations on a demand curve.  If we let the distance between these two points become infiniteismally small, we are effectively evaluating the elasticity of a single point.  We call an elasticity evaluated at a specific price-quantity combination a point elasticity.
  28. What is the constant-elasticity demand form?
    A type of demand curve where the elasticity of demand is the same at every price.

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