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How does the Law of Demand apply to gasoline prices?
As gasoline prices increase, people tend to drive less, carpool more, or switch to more fuel-efficient vehicles, leading to a decrease in quantity demanded.
How does the Law of Supply apply to agricultural products?
If the price of corn rises, farmers will be incentivized to plant more corn, increasing the quantity supplied to the market.
How does inelastic demand affect pricing strategies for prescription drugs?
Because demand is inelastic, companies can increase prices without significantly reducing quantity demanded. This is because people need the drugs regardless of price.
How does elastic supply affect the market for handmade crafts?
If demand increases, producers can quickly increase production, leading to a relatively small price increase.
How does income elasticity affect sales of luxury cars during a recession?
Luxury cars are normal goods with high income elasticity. During a recession (income decreases), demand for luxury cars will decrease significantly.
How does cross-price elasticity affect the demand for coffee when tea prices increase?
Coffee and tea are substitutes. If the price of tea increases, the demand for coffee will increase.
How does a price ceiling on rent affect the housing market?
If the price ceiling is below the equilibrium rent, it creates a shortage of apartments, as quantity demanded exceeds quantity supplied.
How does an excise tax on cigarettes affect the market?
The tax shifts the supply curve to the left, increasing the price of cigarettes and decreasing the quantity sold. This also generates tax revenue for the government.
How does a tariff on imported steel affect domestic steel producers?
The tariff increases the price of imported steel, making domestic steel producers more competitive and increasing their production and profits.
How does a quota on sugar imports affect domestic sugar prices?
The quota limits the amount of imported sugar, leading to higher domestic sugar prices as supply is restricted.
How does the concept of consumer surplus relate to discount sales?
Discount sales increase consumer surplus, as consumers pay less than what they were willing to pay, increasing their overall benefit.
How does producer surplus relate to farmers' markets?
Farmers' markets allow producers to sell directly to consumers, potentially increasing producer surplus by eliminating intermediaries and capturing a larger share of the revenue.
How does market disequilibrium affect the price of concert tickets?
If demand exceeds supply, prices can rise until equilibrium is restored. If supply exceeds demand, prices can fall until equilibrium is restored.
What is the Law of Demand?
As prices rise, quantity demanded falls.
What is the Law of Supply?
As prices rise, quantity supplied increases.
Define Price Elasticity of Demand (PED).
Measures how much quantity demanded changes when price changes.
Define Price Elasticity of Supply (PES).
Measures how much quantity supplied changes when price changes.
What is Income Elasticity of Demand?
Measures how quantity demanded changes with changes in income.
What is Cross-Price Elasticity of Demand?
Measures how quantity demanded of one good changes with the price of another.
Define Market Equilibrium.
The price and quantity at which supply and demand curves intersect.
Define Consumer Surplus.
The difference between what consumers are willing to pay and what they actually pay.
Define Producer Surplus.
The difference between what producers are willing to sell for and what they actually receive.
What is a Price Ceiling?
A maximum legal price set by the government.
What is a Price Floor?
A minimum legal price set by the government.
What is a Tariff?
Taxes on imported goods.
What is a Quota?
Limits on the quantity of imported goods.
Define Deadweight Loss.
The loss of total surplus when the market is not at equilibrium.
What are the differences between elastic and inelastic demand?
Elastic demand is sensitive to price changes (PED > 1), while inelastic demand is not (PED < 1).
What are the differences between elastic and inelastic supply?
Elastic supply is sensitive to price changes (PES > 1), while inelastic supply is not (PES < 1).
What are the differences between normal and inferior goods?
Demand for normal goods increases with income, while demand for inferior goods decreases with income.
What are the differences between substitute and complement goods?
Substitute goods can be used in place of each other (positive cross-price elasticity), while complement goods are used together (negative cross-price elasticity).
What are the differences between price ceilings and price floors?
Price ceilings are maximum prices set below equilibrium, creating shortages. Price floors are minimum prices set above equilibrium, creating surpluses.
What are the differences between tariffs and quotas?
Tariffs are taxes on imports, while quotas are limits on the quantity of imports.
What are the differences between consumer and producer surplus?
Consumer surplus is the benefit consumers receive from paying less than they're willing to pay, while producer surplus is the benefit producers receive from selling for more than they're willing to sell for.