Economics Test Chapter 4-6

Front 1

Explain the law of demand and the law of supply

Back 1

Law of Demand-If the price is high demand is low. If price is low demand is high

Law of Supply-If the price rises the quantity supplied also rises. When price falls quantity supplied also falls.

Front 2

Identify some variables that can shift the demand curve.

Back 2

Income, tastes, prices, expectations and # of buyers

Front 3

Identify some variables that can shift the supply curve

Back 3

Input prices- the supply of a good is negatively related to the price of inputs used to make the good, Technology - advance in tech raises the supply of ice cream (more machines that are better at doing work than we are), expectations, # of sellers- market supply depends on the number of sellers.

Front 4

Why is the equalibrium price called the market clearing price?

Back 4

Because everything gets sold. They don't supply more than they can sell

Front 5

How do prices allocate recourses?

Back 5

Because the price is the main factor that determines whether or not you'll buy something. Higher prices reduce the quantity demand to where it equals the supply. Higher prices also incent suppliers to create more supply, so that ultimately supply and demand balance at the lowest possible price,

Front 6

If the demand curve moves right there is an ______ in demand

Back 6

Increase

Front 7

If the demand curve shifts left there is _____ in demand

Back 7

Decrease

Front 8

Explain what a competitive market consists of

Back 8

So many buyers and sellers that each has a insignificant impact on the market price. The seller has little reason to charge less than the market price and if he charges more than buyers will make purchases somewhere else. Example: Ice cream

Front 9

Behavior of buyers and sellers naturally drives markets toward equilibrium. Why?

Back 9

Because if the price is too high there will be a surplus. If the price is too low there will be a shortage. So they both naturally shift to equilibrium.

Front 10

In market economies, prices are the signals that guide economic decisions and thereby allocate scarce recourses. Why?

Back 10

Because the buyer will buy something depending on the price

Front 11

Why do prices increase after a disaster of nature?

Back 11

Because supply is low

Front 12

What causes market failures?

Back 12

Surpluses or shortages. Not operating at equilibrium

Front 13

How is the equalibrium price determined?

Back 13

How much the market supply and demand intersect

Front 14

What is a monopoly?

Back 14

one seller and they set the price because they're the only one. In mansfield only one company picks up trash.

Front 15

Normal goods

Back 15

Go in the direction on your income (air nikes)

Front 16

Inferior good

Back 16

goes in the opposite direction of your income (keds)

Front 17

What is the difference between substitutes and compliments?

Back 17

Substitutes are equal goods (good year tires v. firestone) If the price of good year goes up the demand for firestone will increase

Compliments are goods that go together. If the price of Golf clubs goes up the demand foe golf bags will decrease

Front 18

What were two ways suggested to reduce smoking?

Back 18

- reduce price

- reduce demand

Front 19

What is the difference between supply and quantity supplied?

Back 19

quantity supplied is the amount that the sellers are willing and able to sell. (supply is the line and quantity are the points on the line)

Front 20

What is price elasticity of demand

Back 20

How sensitive something is to price changes

Front 21

What is the difference between elastic and inelastic demand?

Back 21

elastic- responds substantially to changes in price

inelastic- does not respond to changes in price

Front 22

Determinants of price inelasticity of demand

Back 22

Narrowly defined markets, longer time horizons, and available substitutes (necessity v. luxury)

Front 23

What happens to total revenue when there is a price increase and demand is inelastic

Back 23

Raising the price raises revenue. lowering the price lowers revenue

Front 24

explain perfectly inelastic demand

Back 24

Regardless of price quantity demanded stays the same

Front 25

Why do normal goods have a positive income elasticity?

Back 25

as incomes rise, more goods are demanded at each price level.

Front 26

What the heck is price cross elasticity of demand?

Back 26

How much qty demanded of one good changes in price of another

Front 27

What are some of the characteristics of elasticity of supply

Back 27

Amount supplied response to change in price

Front 28

How can good news for farmers also be bad news for farmers

Back 28

Supplies increase increased but the demand stayed the same so the price went down

Front 29

Why did OPEC fail to keep the price of oil high

Back 29

Gov put a price ceiling on it

Front 30

What is price elasticity of supply

Back 30

How much qty supplied responded to changes in price

Front 31

With inelastic demand for their products, farmers as a group, receive a greater total revenue if they supply a smaller crop to the market. Why?

Back 31

demand stays the same, supplies drops prices will increase

Front 32

Why did OPEC fails to keep the price of oil high?

Back 32

Supply increased, and over the long run the quantity of gasoline needed fell too

Front 33

In most markets, supply is more elastic in the long run than in the short run. why?

Back 33

It gives more time for the demand to decrease

Front 34

how do we determine total revenue

Back 34

price x qty

Front 35

Why do governments enact price controls

Back 35

Their main goal is to help those who can't afford to pay the equilibrium price for the product

Front 36

Give examples of price ceiling and price floors

Back 36

ceiling= rent control

floor= minimum wage

Front 37

Why do rent controls muddy the water?

Back 37

increase demand decrease in supply

Front 38

What happens when the minimum wage is set above the equilibrium wage

Back 38

there is a surplus of workers and a shortage of jobs

Front 39

Why do economists usually oppose price ceiling s and price floors?

Back 39

Ineffective allocation of goods

Front 40

What is meant by the term tax incident

Back 40

who is paying the taxes

Front 41

how do taxes effect market outcomes?

Back 41

taxes increase the price and reduce the supply

Front 42

who really pays the payroll tax?

Back 42

the people with the greatest need

Front 43

Tax burdens usually fall on the side of the market that is less elastic. why?

Back 43

m

Front 44

Who pays the luxury tax

Back 44

sellers