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Jessica Hillis
Bailey
Econ
Unit 2
1. Explain the relationship between price and quantity demanded.
When the price is lower, the quantity demanded will higher, and visa versa.
2. What is the effect of diminishing marginal utility on quantity demanded?
Less will be demanded because there will be less satisfaction in buying products.
3. How does income effect support of the law of demand?
If the income is greater than demand will increase because there is more money to
go around.
4. If the price of beef goes up, what does the substitution effect predict will
happen?
If the price of beef were to increase, then people would begin to demand other
things more, and in effect those prices will also increase.
5. Hoe does a change in demand differ from a change in the quantity
demanded?
A change in demand is based on the entire economy and market, while the
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quantity demanded is based solely on the people, and not the manufacturers.
6. Name and then give an example of how the four determinants of demand
actually can cause a change in demand.
Changes in consumer income if you have more money, you’re likely to consumer
more.
Changes in consumer attitude you attitude, whether it be a better or worse
attitude will affect your demand for a product.
Changes in price of a complementary product – if the price of one decreases, it
will increase the demand of the other.
Changes in price of a substitute product – if the price of one decreases, it will
increase the demand of the other.
7. What does price elasticity of demand measure and how is it calculated?
It measures the relative responsiveness of the change in the quantity demanded
because of the product price.
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8. Name three factors that affect the price elasticity of demand and give
examples of each.
Substitute – More substitute products mean more elasticity
Budget – If the product is a bigger fraction of a person’s spending, it will be more
elastic
Period considered – If a shorter time period is being considered than it will be
more inelastic
9. How is total revenue determined?
Total revenue = (Price) x (Quantity sold)
10. If a product has a price elasticity of 1.3, what would happen to the total
revenue if the price were decreased?
It will increase
11. Explain the difference between a change in quantity supplied and a change in
supply.
Quantity supplied is the overall price change while supply is equal to the change
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in units on the market.
12. Draw a graph of the relationship between price and quantity supplied for
sports utility vehicles.
13. What does the price elasticity of supply measure and how is it calculated?
It is the responsiveness of the quantity supplied to changes in the product’s price.
14. What are the four factors of production?
The four factors are land, labor, capital and entrepreneur.
15. What does the relationship between total product and marginal product?
All units of a product produced at a give time vs. the amount that a total product
increases or decreases as a result of adding one additional unit of an input.
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16. How is the short run different from the long run in economic terms?
Short run – One amount of usable product is fixed and one is not
Long run – all amounts of input can be changed.
17. What is the principle of diminishing marginal product and why is it only
valid in the short run?
As more of one input is added to a fixed amount of other inputs, marginal product
decreases. It is only valid in the short run because it deals with fixed amounts.
18. Explain the relationship between the scale of production and returns to scale
in the long run.
Scales of production is an overall level of use of all factors of production while
returns to scale are the relationship between changes in the scale of production
and the corresponding change in the amount of output.
19. Why should you consider opportunity costs (implicit costs) when making a
production decision?
If you do not take into account the opportunity costs then your business may be
run into the ground because time and money hasn’t been allotted sufficiently.
20. In the short run, what happened to the cost of additional production when
inputs are added? Why?
The cost would decrease.
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21. The rate of output for a product was 1000 units per month. The company
increases all inputs by 20% and outputs increased to 1500 units per month.
Are the returns to scale increasing, decreasing, or constant for this product?
What should happen to production cost per unit?
They are increasing and production should increase because more people will
begin to demand it.
22. When a market is in equilibrium, what is the relationship between the
quantities supplied and demanded?
They are equal to each other.
23. What happens to price and the quantities supplied and demanded when
there is a shortage?
Price will increase, demand will increase, but supply will decrease.
24. What happens to price and the quantities supplied and demanded when
there is a surplus?
Price will decrease, demand will decrease and supply will increase
25. If demand increases what is the effect on equilibrium price and quantity? If
demand decreases, what is the effect on both?
If demand increases then equilibrium will be offset. Supply will decrease but
demand will increase and visa versa for a decrease in demand.
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26. If supply increases, what is the effect on equilibrium price and quantity? If
supply decreases, what is the effect on both?
If supply increases, then demand and price will normally decrease and visa versa
for a decrease in supply.
27. When government sets a price floor, what is the effect on the market? On
consumers? On taxpayers?
Equilibrium cannot be reached, and more money is required to buy and sell
products.
28. When the government sets a price ceiling, what is the effect on the market?
On consumers? On taxpayers?
Equilibrium has already been reached and now exceeded. There is too much
money in economy.