unit 2 ap econ

law of demand

law of demand

as price goes down, quantity goes up
there is an INVERSE relationship between price and quantity demanded

graphing demand

curve goes down

shifters of demand

1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Future Expectations

substitutes

if the price of one increases, the demand for the other will increase
direct relationship

normal goods

as income increases, demand increases
direct relationship

inferior goods

as income increases, demand decreases
inverse relationship

compliments

if the price of one increases, the demand for the other will decrease
inverse relationship

law of supply

as price increases, quantity increases
there is a DIRECT relationship between price and quantity supplied

shifters of supply

1. Prices/availability of inputs (resources)
2. Number of producers
3. Technology
4. Government action: taxes & subsidies
5. Expectations of future profit

inelastic demand

1. if the price elasticity of demand (%change of Q/% change of P) is less than 1
2. if price increases, the quantity demanded will fall a little
3. price increase causes total revenue test to increase

characteristics of inelastic goods

1. Few substitutes
2. Necessities
3. Small portion of income
4. Required now, rather than later
5. Elasticity coefficient less than 1

total revenue test

price x quantity

elastic demand

1. if price increases, quantity demanded will fall a lot
2. price increase causes total revenue test to decrease
3. coefficient greater than 1

characteristics of elastic goods

1. many substitutes
2. luxuries
3. large portion of income
4. plenty of time to decide
5. elasticity coefficient greater than 1 (%change in quantity/%change in price)

percent change formula

new-old/old x 100

price elasticity of supply formula

% change in Q / % change in P

cross-price elasticity of demand

1. shows if goods are substitutes or compliments
2. % change in quantity of product "b" / %change in price of product "a"
3. If the coefficient is positive, then the goods are substitutes
4. If the coefficient is negative, then the goods are complements

Income Elasticity of Demand

1. Shows if goods are normal or inferior
2. % change in quantity / % change in income
3. If coefficient is positive, then the good is normal
4. If the coefficient is negative, then the good is inferior

shortage

demand exceeds supply
When there is a shortage, producers raise prices

surplus

supply is more than demand
When there is a surplus, producers lower prices

consumer surplus

1. the difference between what you are willing to pay and what you actually pay
2. Base x height / 2
3. CS = buyer's maximum - price
4. Everything below the demand curve and above the equilibrium is the CS

producer surplus

1. the difference between the price the seller received and how much they were willing to sell it for
2. PS = price - seller's minimum
3. Base x height / 2
4. Everything above the supply curve and below the equilibrium is the PS

deadweight loss

1. total surplus would decrease
2. P2-P1 x Q2-Q1 / 2

total surplus

consumer surplus + producer surplus

double shift rule

If two curves shift at the same time, EITHER price OR quantity will be indeterminate

price ceiling

1. maximum legal price a seller can charge for a product
2. always create shortages
3. Goal: make affordable by keeping price from reaching equilibrium

price floor

1. minimum legal price a seller can sell a product
2. Goal: keep price high by keeping price from falling to equilibrium
3. Creates a surplus
4. If it's below equilibrium, price and quantity will stay the same
5. Non-binding when the floor is under the equilibrium unless if demand exceeds supply

excise tax

a per unit tax on producers
curve moves UP

tariff

tax on imports that increases the world price

quota

a limit on number of imports

The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
A. inverse, inverse
B. inverse, direct
C. direct, inverse
D. direct, direct
E. strong, weak

C

An increase in the price of a product will reduce the quantity demanded for that product because:
A. supply curves are upward sloping
B. the higher price means purchasing power has risen
C. more complementary goods will be purchased due to the resultant increase in consumer surplus
D. consumers get increasing marginal utility for each new unit of a good they consume
E. consumers will substitute other products for the one whose price has risen

E

Which of the following will NOT cause the demand for video games to change?
A. a change in the price of video games
B. a change in consumer incomes
C. a change in the price of a close substitute
D. a change in consumer tastes
E. a change in consumer preferences

A

An economist for a computer company predicts that a rise in consumer incomes will increase the demand for computers. This prediction assumes that...
A. computers are normal goods
B. there are many complementary goods for computers
C. there are few goods that are substitutes for computers
D. there are many substitutes for computers
E. computers are an inferior good

A

Which of the following statements is correct?
A. An increase in the price of X will decrease the demand for complementary product Y
B. A decrease in income will decrease the demand for an inferior good
C. An increase in income will decrease the demand for a normal good
D. A decrease in the price of X will increase the demand for substitute product Y
E. An increase in the price of X will increase the demand for complementary product Y

A

Assuming Ramen noodles are an inferior good, a decrease in income will shift the...
A. supply curve for Ramen noodles to the left.
B. supply curve for Ramen noodles to the right.
C. demand curve for Ramen noodles to the right
D. demand curve for Ramen noodles to the left.
E. there is no shift

C

Which of the following events will cause the demand curve for hamburgers to shift to the right?
A. An increase in the price of hamburgers
B. A decrease in the number of hamburger consumers
C. An increase in the price of French fries, a complement to burgers
D. An increase in the price of pizza, a substitute for hamburgers
E. A decrease in the cost of producing hamburgers

D

If the cost of producing automobiles increases, the price, equilibrium quantity and consumer surplus will most likely change in which of the following ways?
A. Price Increase, Quantity Increase , Consumer Surplus Increase
B. Price Increase, Quantity Increase, Consumer Surplus Decrease
C. Price Decrease, Quantity Decrease, Consumer Surplus Decrease
D. Price Decrease, Quantity Increase, Consumer Surplus Decrease
E. Price Increase, Quantity Decrease, Consumer Surplus Decrease

E

Other things equal, if the price of a key resource used to produce product X falls, the...
A. product supply curve of X will shift to the left.
B. product demand curve of X will shift to the right.
C. product supply curve of X will shift to the right.
D. product demand curve of X will shift to the left.
E. both the supply and demand of X will increase

C

Assume that consumers consider tea and coffee to be substitutes. A significant increase in the supply of tea will affect the coffee market by...
A. decreasing the demand for coffee and therefore the price of coffee
B. increasing the demand for coffee and therefore the price of coffee
C. increasing the demand for coffee and therefore the supply of coffee
D. increasing the supply of coffee and therefore the price of coffee
E. decreasing the supply of coffee and therefore the price of coffee

A

Assume that Jacob spends his entire income on the purchase of two goods, almonds and Cheezy-Poofs. If his income and the prices of good almonds and Cheezy-Poofs all double, Jacob will...
A. double the purchase of goods almonds and Cheezy-Poofs
B. buy the same amounts of goods almonds and Cheezy-poofs
C. buy less of good almonds and more of good Cheezy-Poofs
D. buy less of both goods almonds and Cheezy-Poofs
E. buy more of good almonds and less of good Cheezy-Poofs

B

Following a severe drought, the price of bottled water normally increases significantly. If cities had passed laws prohibiting price increases for bottled water, during severe droughts such laws would most likely...
A. make bottled water more available
B. shift the supply curve for bottled water to the left
C. shift the demand curve for bottled water to the right
D. create a shortage of bottled water
E. have no effect on the availability of bottled water

D

Promoters of a traveling circus know that if they charged $5 a ticket, 200 people would buy tickets for the circus, and if they charged $2 a ticket, 800 people would buy tickets. Over this price range, the demand for the tickets for the traveling circus is...
A. relatively elastic
B. relatively inelastic
C. unit elastic
D. perfectly elastic
E. perfectly inelastic

A

Assume that people like sauerkraut with their bratwurst. If the supply of bratwurst increases, the demand for sauerkraut will most likely...
A. remain unchanged because bratwurst and sauerkraut are different goods
B. increase because bratwurst and sauerkraut are substitutes
C. decrease because bratwurst and sauerkraut are substitutes
D. decrease because bratwurst and sauerkraut are complements
E. increase because bratwurst and sauerkraut are complements

E

Suppose that the market supply curve for milk is upward sloping and the market demand curve is downward sloping. How will the passage of a subsidy for dairy farmers affect the consumer surplus, the producer surplus, and the total surplus?
A. Consumer Surplus Decrease, Producer Surplus Decrease, Total Surplus Decrease
B. Consumer Surplus Increase, Producer Surplus Increase, Total Surplus Decrease
C. Consumer Surplus Increase, Producer Surplus Decrease, Total Surplus Decrease
D. Consumer Surplus Decrease, Producer Surplus Increase, Total Surplus Decrease
E. Consumer Surplus Increase, Producer Surplus Increase, Total Surplus Increase

E

Citing the epidemic of obesity and type 2 diabetes in America, congress approves a new tax on producers of high fructose corn syrup, one of the key ingredients in soda pop. The price paid by consumers and the quantity of soda pops sold will most likely change in which of the following ways?
A. Price No change, Quantity No change
B. Price Increase, Quantity Increase
C. Price Decrease, Quantity Increase
D. Price Decrease, Quantity Decrease
E. Price Increase, Quantity Decrease

E

Which of the following will tend to make the demand for suspenders more elastic?
A. New firms which produce similar products (such as belts) enter the industry
B. A very popular celebrity starts wearing suspenders, making the product more desirable
C. Suspenders are necessary for use with a complement
D. Production of suspenders is protected by a patent
E. Production cost of suspenders decreases

A

A leftward shift in the supply curve for pianos could be caused by...
A. an increase in the price of pianos
B. improvements in the productivity of piano makers
C. decrease in the price of piano parts
D. decrease in consumer income
E. an increase in the wages of workers that make pianos

E

A decrease in the price of a substitute product will change the equilibrium price and quantity in a market in which of the following ways?
A. Price Increase, Quantity Decrease
B. Price Increase, Quantity Increase
C. Price Decrease, Quantity Increase
D. Price Decrease, Quantity Decrease
E. Price No change, Quantity Decrease

D

If the demand for a product increased at the same time that technological improvements lowered production costs, what would happen to the price and quantity?
A. both price and quantity would increase
B. both price and quantity would decrease
C. price would increase and quantity would decrease
D. price would increase and quantity would be indeterminate
E. price would be indeterminate and quantity would increase

E

Assume the price of a specific good decreases from $12 to $10 per unit and the quantity demanded increased from 10 to 15. Which of the following is true?
A. The demand for this good is unit elastic in this price range
B. The demand for this good is relatively inelastic in this price range
C. The demand for this good is relatively elastic in this price range
D. The demand for this good is perfectly elastic
E. Firms would lower their price

C

Which of the following is true for the market to the right?
(p<b> = $50 and q</b> = 10 units) (demand: when q = 0, p = $100 supply: when q = 0, p = $20) or refer to graph on spreadsheet #22
A. At a price of $30 there would be a surplus
B. Consumer surplus is $250
C. A price floor at $30 would decrease the quantity produced
D. Consumer surplus is $500
E. At $70 the quantity demanded is greater than the quantity supplied

B

Product X has an income elasticity of demand coefficient of -2. It also has a cross-price elasticity of demand coefficient of -2 with product Y. Which of the following is true?
A. An increase in the price for product X will cause an increase in total revenue for product X
B. Product X and product Y are substitutes
C. Product Y is an inferior good
D. An increase in the price of product Y will decrease the demand for product X
E. The demand for product X is relatively elastic

D

The graph below shows the domestic supply and demand for a product. Assuming this country can import the product at a world price of $5, all the following are true EXCEPT:
A. Domestic producer surplus will be E
B. Domestic consumer surplus will be ABCD
C. The sum of producer and consumer surplus will increase
D. A shortage will develop since the quantity demanded is greater than the quantity supplied
E. This country will import 50 units
--refer to graph on spreadsheet (#24)--

D

The product below is subject to a per unit excise tax. Identify the consumer surplus before the tax, the consumer surplus after the tax, and the total tax revenue that goes to the government
--refer to graph on spreadsheet (#25)--
A. CS Before tax ABCD, CS After Tax A, Total Revenue BCEIJ
B. CS Before tax ABCD, CS After Tax A, Total Revenue BCE
C. CS Before tax ABCD, CS After Tax AB, Total Revenue EIJ
D. CS Before Tax ABCD, CS After Tax AB, Total Revenue E
E. CS Before Tax IEF, CS After Tax I, Total Revenue BCE

B

if demand for pizza is inelastic, will an increase in price cause the total revenue to increase, decrease, or stay the same

increase

incomes increase by 40% and the quantity demanded of hot dogs decrease by 40%. Are hot dogs elastic, inelastic, inferior, or normal

%Q/%Income = -40%/40% = -1
inferior