AP Microeconomics: Unit 2A, Nature and Functions of Product Market

What happens if the government imposes a price ceiling below the equilibrium price of a good?

There will be a shortage in the market

What will decrease a demand for beef?

An increase in the price of potatoes, if potatoes and beef are complementary.

Consumer surplus is defined as

the difference between the value that consumers place on a good and the price.

What would cause the equilibrium price of a good X to increase?

Good X is an inferior good, and the government decreases income taxes.

If the demand for good Y increases as the price of good X decreases, it can be concluded that

X and Y are complementary goods

If bologna is an inferior good

an increase in consumer income will decrease the demand for bologna.

The demand curve for hamburgers will shift to the right

when there's an increase in the price of pizza, a substitute for hamburger.

The supply curve for automobiles will shift to the left in response to

an increase in wages in the automobile industry.

A thirsty athlete pays $.85 for a drink when she would have gladly paid $1.50 for the drink is an example of

consumer surplus

An increase in demand likely to for air travel is most

shift the demand curve for aircraft mechanics to the right

In a perfectly competitive market, which of the following shifts in the supply and demand curves will definitely case both the equilibrium price and quantity to decrease?

Supply curve, no shift; Demand curve, shift to the left

The market is currently in equilibrium. Where is the area of consumer plus?

(graph will be shown)

WYZ

If the price for a product produced in a competitive market increases, what is most likely to occur in the labor market for workers who produce that product?

the demand for labor and the number of workers both increase

What happens if the price of the product decreased?

the quantity of the product sold has increased

The graph above shows the supply and demand curves for gasoline. What will happen if the government establishes a price ceiling of $1.20?

(graph will be shown)

neither a surplus nor a shortage

Suppose that a large number of unskilled workers enter a nation's labor market. If the labor market is competitive, the number of unskilled workers will increase and the wage rate will most likely __________.

decrease

Assume that consumers consider potatoes to be an inferior good, but consider rice to be a normal good. An increase in consumers' incomes will most likely affect the equilibrium price and and quantity of potatoes and rice in what ways?

Potatoes: price decrease, quantity decrease

Rice: price increase, quantity increase

Assume that a consumer spends all her income on the purchase of two goods. What will happen if the consumer's income doubles and the prices of the two goods also double?

the quantity of the two goods purchased will not change

What tends to increase the gap in earnings between skilled and unskilled workers over time?

a decrease in the demand for unskilled workers relative to skilled workers

The graph above shows the supply and demand curves for artichokes. If the surgeon general announces eating an artichoke a day dramatically reduces canser and the artichoke crop is severely damged by infestation, what will happen to the price of artichokes?

(graph will be shown)

the price of artichokes will increase

The surgeon general determined that smoking causes cancer for both smokers and passive smokers. What will happen if cigarette prices are determined in a free market?

the price of cigarettes will be too low and the quantity sold will be too high

The graph above illustrates the labor market for teenage workers. The current minimum wage is W1. If Congress introduces a subminimum wage W2 that applies only to teenagers, what will happen?

(graph will be shown)

teenage employment will increase because firms will want to hire more teenagers at W2 than at W1

The allocation of resources in a market economy is described by

buyers and sellers exchange goods and services on a voluntary basis and prices and costs help producers decide whether they are producing too little or too much

What is the intention of the government in creating a price floor?

assist producers of the good

The graph above illustrates the market for tomatoes. If the demand increases while the supply decreases, what will happen to the price of tomatoes?

(graph will be shown)

the price of tomatoes will definitely increase

What is a factor that causes a firm's cost curves to shift upward?

increase in wages

If the demand for potatoes increase whenever a person's income increases, then ______________.

potatoes are an example of a normal good

The American Heart Association has just issued a report warning consumers about the negative health effects of eating beef. The changes in the beef market will shift the demand cuve to the ____________.

left, decreasing the price of beef

Describe complementary goods

the increase in the price of one good decreases the demand for another

Which of the following will not cause a shift in the demand curve for a factor of production?

a. demand for the goods produced by the factor

b. prices of the goods produced by the factor

c. prices of the substitutes factors

d. supply of the factor

e. supply of the substitutes factors

supply of the factor (c)

If a one of a kind vase is offered for sale at an auction, which of the following correctly shows the supply curve for the vase.

x axis- quantity

y axis- price

supply is a vertical line

What will cause a fall in the price of a product

a decrease in the price of the substitute product and an improvement in production technology

The market equilibrium price of home heating oil is $1.50 per gallon. If a price ceiling of $1.00 per gallon is imposed, what will occur in the market for home heating oil?

quantity demanded will increase and quantity supplied will decrease

What will inevitably cause a shift in the market for workers with a certain skill?

An increase in the demand for goods produced by these workers.

An effective price floor introduced in the market for rice will result in what?

an increase in the price of rice and an excess supply of rice

What leads to an increase in the supply of a good?

an improvement in production technology for a certain good.

If an increase in the price of good X causes a drop in demand for good Y, ________________.

good Y is a complement to good X

Assume that the products X and Y are substitutes. If the cost of producing X decreases and the price of Y increases, what happens.

the equilibrium price can increase or decrease and the quantity of X increases

Why is the demand curve for cars downward sloping?

an increase in the price of cars leads to the increased use of other modes of transportation

Leather and beef are jointly produced such that an increase in the production of one results in an equal increase in the production of the other. What will most likely cause a decrease in the price of the beef?

an increase in the demand for leather

Law of Demand

the claim that, all things equal, the quantity demanded of a good falls when the price of the good rises. (inverse relationship between price and quantity demanded)

Law of Supply

the claim that, all things equal, the quantity supplied of a good rises when the price also rises (direct relationship between quantity supplied and price)

What will only occur due to a change in price?

movement along a curve

Shifters of Demand

(merit)

- market size

- expected prices

- related prices

- income

- tastes

Shifters of Supply

(price)

- technology

- related prices

- input prices

- competition

- expected prices

(factors that shift demand) Consumers preferances and tastes

people are willing to buy some products at a higher price because some people are more into particular goods

(factors that shift demand) Consumer's income

an increase in income can cause an increase or decrease of goods demanded

(factors that shift demand) Numer of consumers in the market

an increase in the number of consumers in the market is most likely to result in an increase in the demand for the good or service

(factors that shift demand) Consumer's expectations

if people expect the price of the good will increase, they will buy it before the price increases. On the other hand, if they expect the price of a good to decrease, they will wait before the price drops.

(factors that shift demand) Prices of related goods

related goods are either sustitutes or complements. Increase price in substitutes or complements can cause increase or decrease in quantity demanded

(factors that shift supply) Technology

improvements in technology will encourage the firm to produce more at the same price

(factors that shift supply) The price of goods used as an input in production

more expensive inputs increases the cost of production of goods and services, and may force the firm to sell less at a given price

(factors that shift supply) Number of firms in the market

if more firms in the market increase, supply increases, as more goods or services will be available for sale at each price

(factors that shift supply) Seller's expectation of future prices

if a firm expects the price of a good to increase in the future, they will sell less today and more in the future

(factors that shift supply) Government taxes, subsidies, and regulations

Government's policies or rules can affect the supply

(factors that shift supply) Number of sellers in the market

more sellers in the market means more supply

Equilibrium

a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Surpluses

- amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above equilibrium) price

- cause price to decrease

Shortages

- amount by which the quantity demanded of a product exceeds quantity supplied at a particular (below equilibrium) price

- cause price to rise

Supply curve

upward (/)

Demand curve

downward (\)

Consumer surplus

amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it

Producer surplus

amount a seller is paid for a good minus the seller's cost of providing it

Deadweight loss

the fall in total surplus that results from a market distortion, such as tax

Price ceiling

- a legally established MAXIMUM price for a good or service

- below equlibrium price

- leads to a shortage

- (ex) rent, usury laws

Price floor

- minimum price that government allows sellers to recieve for a good or service; legally established or maintained MINIMUM price

- above equlibrium price

- leads to a surplus

Normal good

a good for which, all things equal, an increase in income leads to an increase in demand (iPhones, frappuccinos, Mercedes-Benz)

Inferior good

a good for which, all things equal, an increase in income leads to a decrease in demand (public bus rides, off-brand foods, Taco Bell)

Substitutes

two goods for which an increase in the price of one leads to an increase in the demand of another (McDonalds and Wendy's)

Complements

two goods for which an increase in the price of one leads to a decrease in the demand of another (peanut butter and jelly)