Macro/Micro Exam 1 Practice Cards

What is scarcity, and why is it a fundamental concept in economics?

Scarcity means that resources are limited while human wants are unlimited. This necessitates making choices about resource allocation, leading to trade-offs and opportunity costs.

What happens to equilibrium price and quantity if demand for a product increases while supply remains constant?

Both equilibrium price and quantity increase due to higher demand.

What does the law of supply state?

As the price of a good increases, the quantity supplied also increases.

What likely result occurs when the government sets a price below equilibrium (a price ceiling)?

A shortage occurs, as demand exceeds supply.

How does a tax imposed on a product affect the quantity sold in the market?

The quantity sold decreases due to the tax raising prices for buyers.

What happens to equilibrium price when demand increases and supply decreases at the same time?

The equilibrium price increases.

If two goods have a cross-price elasticity of -1.5, what does this indicate about their relationship?

The goods are complementary; a rise in the price of one leads to decreased demand for the other.

What does it signify if demand is elastic?

A small price change leads to a large change in quantity demanded.

Why is the supply curve for wheat more elastic in the long run than in the short run?

In the short run, farmers cannot quickly change production levels compared to the long run.

Why do vacationers typically have more elastic demand for airline tickets than business travelers?

Vacationers can adjust travel plans and are more sensitive to price changes, unlike business travelers.

What is the formula for calculating elasticity (midpoint formula)?

Ed=(Q2−Q1)/average Q ÷ (P2−P1)/average P.

What happens when the government imposes a price floor above equilibrium?

A surplus occurs, as suppliers produce more than consumers are willing to buy.

What effect does a tax have on a market?

A tax shifts the supply curve left, increasing prices and reducing the quantity sold.

If the price elasticity of demand for gasoline is 0.5, and the government wants to reduce consumption by 20%, by how much should the price increase?

By 40%.

What happens to demand for public transportation when gas prices increase significantly?

Demand for public transportation increases.

How does technological advancement in sweater production affect the market?

It increases supply, lowering equilibrium price and increasing quantity.

What happens to demand for used SUVs when gas prices rise?

Demand decreases as operating costs become more expensive.

What is the distinction between movement along a demand curve and a shift of the demand curve?

Movement occurs with price changes; shifting happens due to non-price factors.

Why is demand for airline tickets more elastic in the long run than in the short run?

Travelers can adjust their behaviors, find alternatives, or avoid travel.

What happens in the market when a hurricane damages the cotton crop?

The supply of cotton decreases, increasing the price of sweatshirts.

How does increased production efficiency for oranges affect the orange market?

The supply curve shifts right, increasing quantity and lowering prices.

What is opportunity cost?

The value of the next best alternative that is given up when making a choice.

How does an increase in consumer income affect demand for normal goods?

Demand for normal goods generally increases when consumer income rises.

What distinguishes a public good from a private good?

Public goods are non-excludable and non-rivalrous, while private goods are excludable and rivalrous.

What is the concept of market equilibrium?

Market equilibrium is the point where the quantity demanded equals the quantity supplied.

What does the term ‘monopoly’ refer to in economics?

A monopoly occurs when a single seller dominates the market with no close substitutes.

How does inflation affect purchasing power?

Inflation decreases purchasing power, as prices increase while the value of money decreases.

What is the difference between microeconomics and macroeconomics?

Microeconomics studies individual economic units, while macroeconomics examines the economy as a whole.

What does the term ‘elasticity of supply’ mean?

Elasticity of supply measures how much the quantity supplied responds to price changes.

What role do prices play in a market economy?

Prices serve as signals to allocate resources efficiently and coordinate economic activity.

What is a negative externality?

A negative externality occurs when a product or decision negatively affects a third party not involved in the transaction.

What is a price taker in a competitive market?

A price taker is a buyer or seller who accepts the market price as given and cannot influence it.

What is the impact of a subsidy on a product's market price?

A subsidy lowers the market price and increases the quantity supplied.

What is consumer surplus?

Consumer surplus is the difference between what consumers are willing to pay and what they actually pay.

How does an increase in the number of suppliers affect the market?

It typically increases supply, leading to lower prices and higher quantity sold.

What are inferior goods?

Inferior goods are those whose demand increases when consumer income decreases.