Supply and demand, elasticity, market structures, and cost curve concepts and formulas.
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- What does the law of demand state?
- As the price of a good decreases, the quantity demanded increases, all else equal.
- What does the law of supply state?
- As the price of a good increases, the quantity supplied increases, all else equal.
- Define market equilibrium.
- The point where quantity demanded equals quantity supplied at a single price.
- Distinguish between a movement along the demand curve and a shift of the demand curve.
- A movement along the curve is caused by a price change; a shift is caused by a change in other factors (income, preferences, prices of related goods).
- List three determinants of supply.
- Input prices, technology, and seller expectations (or number of sellers).
- Define a shortage in a market.
- The situation when quantity demanded exceeds quantity supplied at a given price.
- Define a surplus in a market.
- The situation when quantity supplied exceeds quantity demanded at a given price.
- What is the economic effect of a price ceiling below equilibrium?
- It creates a shortage, as the quantity demanded exceeds the quantity supplied at the ceiling price.
- What is the economic effect of a price floor above equilibrium?
- It creates a surplus, as the quantity supplied exceeds the quantity demanded at the floor price.
- Define consumer surplus.
- The difference between what consumers are willing to pay for a good and what they actually pay.
- What is the formula for price elasticity of demand?
- PED = (percentage change in quantity demanded) / (percentage change in price)
- What does it mean if the price elasticity of demand is greater than 1 in absolute value?
- Demand is elastic, meaning quantity demanded responds strongly to price changes.
- What does it mean if the price elasticity of demand is less than 1 in absolute value?
- Demand is inelastic, meaning quantity demanded does not respond much to price changes.
- Define income elasticity of demand.
- The percentage change in quantity demanded divided by the percentage change in income.
- Define cross-price elasticity of demand.
- The percentage change in quantity demanded of one good divided by the percentage change in price of another good.