Econ Unit 2 Quiz
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40 Terms
What determines the market price?
The interaction of supply and demand.
What is the law of demand?
As price rises, quantity demanded falls, all else equal.
Why does the demand curve slope downward?
Because of the income effect and substitution effect.
What is the income effect?
A price change changes consumers’ purchasing power.
What is the substitution effect?
Consumers switch toward relatively cheaper alternatives.
Change in demand vs. quantity demanded?
Demand shifts; quantity demanded changes along the curve.Demand shifts; quantity demanded changes along the curve.
What can shift the demand curve?
Income, tastes, expectations, related goods, and number of buyers.
What is the law of supply?
As price rises, quantity supplied rises, all else equal.
Change in supply vs. quantity supplied?
Supply shifts; quantity supplied changes along the curve.
What can shift the supply curve?
Input costs, technology, expectations, sellers, and government policy.
What is price elasticity of demand?
How responsive quantity demanded is to price changes.
Formula for price elasticity of demand?
% change in quantity demanded ÷ % change in price.
What does elastic demand mean?
Quantity demanded changes more than price.
What does inelastic demand mean?
Quantity demanded changes less than price.
What does unit elastic mean?
Quantity demanded changes by the same percentage as price.
What is perfectly inelastic demand?
Quantity demanded does not change when price changes.
What is perfectly elastic demand?
A tiny price change causes quantity demanded to change greatly.
What affects price elasticity of demand?
Substitutes, necessity, time, and share of income.
What is the total-revenue test?
It uses price × quantity to see how revenue changes.
If demand is elastic, what happens to revenue when price rises?
Total revenue decreases.
If demand is inelastic, what happens to revenue when price rises?
Total revenue increases.
If demand is unit elastic, what happens to revenue?
Total revenue stays about the same.
What is price elasticity of supply?
How responsive quantity supplied is to price changes.
Formula for price elasticity of supply?
% change in quantity supplied ÷ % change in price.
What affects price elasticity of supply?
Time and how easily producers can change output.
What is income elasticity of demand?
How demand responds to changes in consumer income.
Formula for income elasticity of demand?
% change in quantity demanded ÷ % change in income.
What does positive income elasticity indicate?
The good is a normal good.
What does negative income elasticity indicate?
The good is an inferior good.
What is cross-price elasticity of demand?
How demand for one good responds to another good’s price.
Formula for cross-price elasticity?
% change in demand for X ÷ % change in price of Y.
What does positive cross-price elasticity mean?
The goods are substitutes.
What does negative cross-price elasticity mean?
The goods are complements.
What is market equilibrium?
The point where quantity demanded equals quantity supplied.
What is equilibrium price?
The price where quantity demanded equals quantity supplied.
What is consumer surplus?
The benefit buyers receive above what they pay.
What is producer surplus?
The benefit sellers receive above their minimum acceptable price.
What is a surplus?
Quantity supplied is greater than quantity demanded.
What is a shortage?
Quantity demanded is greater than quantity supplied.
What happens when demand or supply shifts?
What happens when demand or supply shifts?