Elasticity of Demand | Perfect Inelastic Demand

Why is there no such thing as a perfectly inelastic demand?

Your Answer:

Perfectly inelastic demand suggests that any price can be charged for a good and consumers will still buy it. However, no matter how much a good is desired and/or needed, the price charged for that good cannot be changed without affecting the purchasing pattern of the consumers who desire it. Even a good necessary to maintain life cannot be priced beyond a certain level or consumers will simply seek a substitute good or other options.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Elasticity of Demand | Substitue Good

What impact does time have on demand elasticity and the use of substitute goods?

Your Answer:

Although many things happen faster and faster these days, it still requires an investment of time to discover and obtain substitute goods. Therefore, if the price of a good rises, consumers will seek out cheaper substitute goods, and the more time they have to conduct there search, the more likely it is that they will be able to obtain a cheaper substitute. With greater time available to search for substitute goods, the more elastic a demand for any good will be.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Demand | Price of Good Fall - Complementary Good

If the price of a good falls, what impact will this have on a complementary good?

Your Answer:

Complementary goods are those goods that mutually add to the enjoyment of each other, like hamburgers and French fries. 

If the price of a good falls, the law of demand tells us that a greater quantity of that good will be sold, and a greater quantity of a complementary good will also be sold.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Demand | Price of Good Rise - Substitute Good

If the price of a good rises, what impact will this have on a cheaper substitute good?

Your Answer:

Substitute goods are any good that can be used instead of another good to more or less take its place. Common sense and economic principles assert that if the price of any good rises, the demand for a cheaper substitute good also rises as people seek out alternatives that may be less costly.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Demand | What Else is Needed to Change the Demand?

Since a change only in the price of a good does not change the demand for that good, what else is needed to change the demand?

Your Answer:

For the demand of a good to change, consumers must be willing to pay higher prices for any quantities of a good than was previously the case, or they decide that they will only pay lower prices for any quantities of a good than was previously the case. 

Changes in attitudes toward the good or toward a compliment or substitute good must change to reflect a wholesale change in demand.

Source: Heyne, Boettke, and Prychitko, The Economic Way of Thinking, 11/e, Pearson

http://wps.prenhall.com/bp_heyne_econway_11/33/8535/2184986.cw/-/2184999/index.html

Supply & Demand | Additional Resources | Moving Along the Curve | Shifting the Curve | Government Intervention

Supply & Demand

Additional Resources

Demand Curve – Moving Along the Curve

http://www.college-cram.com/study/economics/supply-and-demand/demand-curve-moving-along-the-curve/

Demand Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/demand-curve-shifting-the-curve/

Supply Curve – Moving Along the Curve

http://www.college-cram.com/study/economics/supply-and-demand/supply-curve-moving-along-the-curve/

Supply Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/supply-curve-shifting-the-curve/

Equilibrium Curve – Shifting the Curve

http://www.college-cram.com/study/economics/supply-and-demand/equilibrium-curve-shifting-the-curve/

Government Intervention and Economics: Price Ceiling

http://www.college-cram.com/study/economics/government-intervention/price-ceiling/

Government Intervention and Economics: Price Floor

http://www.college-cram.com/study/economics/government-intervention/price-floor/

Resources provided from www.College-Cram.com

Preliminaries| Positive or Normative ?

Are the following statements positive or normative? (If a sentence has both positive and normative parts, break it into positive and normative statements.)

1. A minimum wage causes some people to lose their jobs.

2. The minimum wage is a good policy because it helps poor people.

3. The minimum wage raises costs to firms and hence is bad.

Answers:

1. Positive.

2. Normative.

3. "The minimum wage raises costs" is positive; "The minimum wage is bad" is normative.

Source: Perloff, Microeconomics, 5^th edition, Pearson

http://wps.aw.com/aw_perloff_microecon_5/85/21981/5627218.cw/index.html

Supply & Demand | How Do We Use Information To Predict Market Behavior?

If we can estimate the supply and demand curves for a particular market, how do we use that information to predict market behavior?

Your Answer:

With an estimate of supply and demand, it is possible to predict the behavior of price and quantity in a market. Supply and demand estimates are used to calculate the market-clearing price and the corresponding equilibrium quantity, where quantity demanded equals quantity supplied. We can also use supply and demand estimates to predict the direction of price and quantity in the market as variables other than price change. Predicting market behavior, therefore, means examining the impact of changes in economic variables, such as income and the prices of other goods, on equilibrium price and quantity.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Short-Run / Long-Run Price Elasticity of Demand

In July 2008, average prices for household energy were 18% higher than in July 2007. Fuel oil and other fuels prices were up 61%, while natural gas and electricity prices were up 18%, according to the U.S. Bureau of Labor Statistics. How is the short-run price elasticity of demand likely to differ from the long-run price elasticity of demand for household energy products?

Your Answer:

For most products, long-run demand is more elastic than short-run demand, and the demand for household energy products is no different. 

For the winter of 2008, many consumers will pay higher prices for fuel oil, but will likely consume a slightly lower quantity: Demand will be inelastic in the short run. 

As time passes, however, many households will install more energy efficient windows and insulation to minimize heat loss in the winter. Some households will switch to using electric space heaters or electric heating systems as electricity prices rise more slowly than home heating oil prices. Some householders will move to smaller homes to reduce home heating needs over time as well. 

In the long run, the percentage change in quantity of home energy demanded in response to price will be much larger: Demand will become much more price elastic.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Complementary Good

Home mortgage loans and new homes are complementary goods. Interest rates fell beginning in the fall of 2001 and stayed at historically low levels for several years. Using the supply and demand model, discuss how falling interest rates affect the equilibrium price and quantity of the new home market.

Your Answer:

Falling interest rates cause the monthly payments for a new home to fall, all else remaining equal, which makes the purchase of a new home more affordable. 

As the interest rate and monthly mortgage payments fall, the demand for new homes increases, since mortgages and new homes are complementary products. The increase in demand for new homes is illustrated by a right shift in the demand curve. 

All else remaining equal, the equilibrium price and quantity of new homes will rise when interest rates fall.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Supply & Demand | Market Mechanism

The market mechanism is the tendency for prices to change until the quantity demanded equals the quantity supplied. Provide an explanation how the market adjusts to the market equilibrium when the price in the market is not originally set at the market equilibrium price.

Your Answer:

Market equilibrium is a situation in which there is no surplus or shortage of output, and no pressure for the price to change. Free markets have a tendency to settle down in equilibrium.

When price is higher than the market equilibrium, a surplus develops. A surplus means that the quantity supplied is greater than the quantity demanded, and the market is out of equilibrium. Disequilibrium in this case puts downward pressure on price. As the price falls, the quantity demanded increases, as more consumers are willing and able to purchase the good. As the price falls quantity supplied falls, as firms are less willing to bring the good or service to market. Once the price falls to the point where the quantity demanded equals the quantity supplied, the market is in equilibrium with no tendency to change.

When price is lower than the market equilibrium, a shortage develops. A shortage means that the quantity demanded is greater than the quantity supplied, and the market is out of equilibrium. Disequilibrium in this case puts upward pressure on price. As the price rises, the quantity demanded falls, as fewer consumers are willing and able to pay for the good or service. Quantity supplied rises as the price rises, until the market equilibrium price is reached and the quantity demanded equals the quantity supplied.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582421.cw/index.html

Preliminaries | Microeconomist & Designer of Public Policy

Describe the job of a microeconomist in the corporate world. Also, describe the job of a microeconomist as a designer of public policy.

Your Answer:

In the first case, a microeconomist studies the supply and demand conditions of the market in which the corporation does business. 

On the supply side, the economist studies both the firm itself and the industry in which the firm operates. Among other issues, the economist studies the nature and direction of competition, cost and production methods, as well as price and profit strategies and expectations. 

On the demand side, the economist studies the determinants of demand for such as the number of buyers, their income, tastes and preferences, their expectations, as well as the price of related goods, both substitutes and complements. Consumer behavior and responsiveness to price changes are also key aspects of microeconomic analysis.

As a designer of public policy, a microeconomist studies policy choices and their effect on consumers, businesses and market prices and output levels. 

The economist studies benefits and costs associated with government policies, and is concerned with the efficiency, fairness, and equity results of such policies. 

The microeconomist also helps to determine the optimal level of an activity such as the production or consumption of a good or service. The economist lists and studies options and presents information that can be used by policymakers to make more informed policy decisions.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582392.cw/index.html

Preliminaries | Market Boundaries

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What are the market boundaries for your university's bookstore? How have these boundaries changed over the last few years?

Your Answer:

The extent of a market is characterized by its geographical boundaries and the range of products to be included in it. 

Over the years, university bookstores have confronted a less restrictive market boundary. For example, they must now compete with the sale of textbooks on-line. The range of products has also changed. 

Bookstores don't sell just books anymore. They now offer a much wider array of products. In this sense, their market boundaries have also expanded. 

Perhaps the only aspect of these businesses that remains under a more restricted boundary is the sale of university memorabilia, which other stores around town or on the Internet may not have readily available. 

In most respects, therefore, the boundaries of your university bookstore have expanded significantly over the last few years.

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582392.cw/index.html

Preliminaries | Positive Analysis vs Normative Analysis

List three examples of positive economic analysis and three examples of normative analysis associated with the imposition of a new tobacco tax.

Your Answer:

Some subjects of positive analysis include 

1) explanation of how the tax will affect the purchase of tobacco; 

2) predictions about the impact of the tax on the price and quantity exchanged in the market as well as in the markets for related goods; 

3) numerical estimates about the impact of the tax on consumers and producers.

Possible subjects of normative analysis include 

1) What are the sources and uses of revenue associated with the tax, i.e. who pays and who benefits? 

2) Is the tax equitable? Do people in similar situations pay about the same amount of tax? 

3) Is the tax fair? Is the amount of tax proportional to the willingness of tobacco users to pay? 

4) Will the tax be shifted to one group who will bear most of the tax burden? 

5) How does this tax compare to other tax choices?

Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582392.cw/index.html

Preliminaries | Concept of Trade-Offs

Discuss the concept of trade-offs from an economic theory perspective, and give three examples of trade-offs that a consumer, a worker or a firm might make.

Your Answer:

Resources are scarce, and so when consumers, businesses and workers choose to do one thing with their time and resources, they are choosing not to do other things. 

Consumers must choose which goods or services they will buy and which they will forgo. 

Workers decide which type of work they will do, or even if they will work at all. Workers might also choose not to work or work less in order to pursue additional training. 

Firms must decide which market they will produce goods or services for, and how much they will produce. When market conditions change and profitability changes, they may choose to leave or enter a market.

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Source: Pindyck / Rubinfeld, Microeconomics, 7th edition, Pearson

http://wps.prenhall.com/bp_pindyck_micro_7/100/25712/6582392.cw/index.html