Reading 8 – Demand and Supply Analysis

question

Own Price Elasticity

answer

a measure of the responsiveness of quantity demanded to a change in price

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cross price elasticity

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good

question

elastic good

answer

|own-price elasticity| > 1

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inelastic good

answer

|own-price elasticity| < 1

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substitute good

answer

cross-price elasticity > 0

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complement good

answer

cross-price elasticity < 0

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inferior good

answer

income elasticity < 0

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normal good

answer

income elasticity > 0

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substitution effect

answer

When the price of a good decreases, the ______ leads a consumer to consume more of that good and less of goods for which prices have remained the same.

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income effect

answer

A decrease in the price of a good that a consumer purchases leaves her with unspent income (for the same combination of goods). The effect of this additional income on consumption of the good for which the price has decreased is termed the:

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normal good

answer

the income effect of a price decrease is positive—income elasticity of demand is positive.

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inferior good

answer

the income effect of a price decrease is negative—income elasticity of demand is negative. An increase in income reduces demand for an:

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Giffon good

answer

an inferior good for which the negative income effect of a price decrease outweighs the positive substitution effect, so that a decrease (increase) in the good's price has a net result of decreasing (increasing) the quantity consumed.

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Veblen Good

answer

s also one for which an increase (decrease) in price results in an increase (decrease) in the quantity consumed. However, is not an inferior good and is not supported by the axioms of the theory of demand.

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Marginal returns

answer

the additional output that can be produced by using one more unit of a productive input while holding the quantities of other inputs constant.

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breakeven quantity (perfect competition)

answer

is the quantity for which price (P) = average total cost (ATC) and total revenue (TR) = total cost (TC).

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long run (perfect competition)

answer

The firm should shut down in the _____ if P < ATC so that TR < TC.

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short run (perfect competition)

answer

The firm should shut down in the ______ (and the long run) if P < average variable cost (AVC) so that TR < total variable cost (TVC).

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breakeven quantity (imperfect competition)

answer

is the quantity for which TR = TC.

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long run (imperfect competition)

answer

if TR < TC.

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short run (imperfect competition)

answer

if TR < TVC.

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long-run average total cost (LRATC)

answer

shows the minimum average total cost for each level of output assuming that the plant size (scale of the firm) can be adjusted.

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economies of scale

answer

downward-sloping segment of an LRATC curve (increasing returns to scale) Over such a segment, increasing the scale of the firm reduces ATC

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diseconomies of scale

answer

An upward-sloping segment of an LRATC curve, where average unit costs will rise as the scale of the business (and long-run output) increases

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question

Own Price Elasticity

answer

a measure of the responsiveness of quantity demanded to a change in price

question

cross price elasticity

answer

a measure of how much the quantity demanded of one good responds to a change in the price of another good

question

elastic good

answer

|own-price elasticity| > 1

question

inelastic good

answer

|own-price elasticity| < 1

question

substitute good

answer

cross-price elasticity > 0

question

complement good

answer

cross-price elasticity < 0

question

inferior good

answer

income elasticity < 0

question

normal good

answer

income elasticity > 0

question

substitution effect

answer

When the price of a good decreases, the ______ leads a consumer to consume more of that good and less of goods for which prices have remained the same.

question

income effect

answer

question

normal good

answer

the income effect of a price decrease is positive—income elasticity of demand is positive.

question

inferior good

answer

the income effect of a price decrease is negative—income elasticity of demand is negative. An increase in income reduces demand for an:

question

Giffon good

answer

question

Veblen Good

answer

question

Marginal returns

answer

the additional output that can be produced by using one more unit of a productive input while holding the quantities of other inputs constant.

question

breakeven quantity (perfect competition)

answer

is the quantity for which price (P) = average total cost (ATC) and total revenue (TR) = total cost (TC).

question

long run (perfect competition)

answer

The firm should shut down in the _____ if P < ATC so that TR < TC.

question

short run (perfect competition)

answer

The firm should shut down in the ______ (and the long run) if P < average variable cost (AVC) so that TR < total variable cost (TVC).

question

breakeven quantity (imperfect competition)

answer

is the quantity for which TR = TC.

question

long run (imperfect competition)

answer

if TR < TC.

question

short run (imperfect competition)

answer

if TR < TVC.

question

long-run average total cost (LRATC)

answer

shows the minimum average total cost for each level of output assuming that the plant size (scale of the firm) can be adjusted.

question

economies of scale

answer

downward-sloping segment of an LRATC curve (increasing returns to scale) Over such a segment, increasing the scale of the firm reduces ATC

question

diseconomies of scale

answer

An upward-sloping segment of an LRATC curve, where average unit costs will rise as the scale of the business (and long-run output) increases

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Reading 8 – Demand and Supply Analysis

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