According to the law of demand, what is the relationship between the price of a good and the quantity demanded, assuming all other factors remain constant?

As the price rises, the quantity demanded falls.

According to the law of supply, what is the relationship between the price of a good and the quantity supplied, and what does this imply for the shape of the supply curve?

The law of supply states that as the price of a good rises, the quantity supplied also rises. This positive relationship means the supply curve slopes upward.

If the price of tea increases, what is the most likely impact on the demand curve for coffee, assuming they are substitute goods?

The demand curve for coffee will shift to the right.

If the current price of a product is below the market equilibrium price, what is the expected outcome?

A shortage will occur, pushing the price up.

What market condition exists when the price is set above the equilibrium price, and what is the resulting pressure on the price?

A surplus exists, which puts downward pressure on the price.

A government imposes a price ceiling on apartments below the market equilibrium price, a policy known as rent control. What is the direct consequence of this action in the housing market?

A shortage of apartments, as the quantity demanded will exceed the quantity supplied.

A 5% increase in the price of a good leads to a 2% decrease in the quantity demanded. Calculate the Price Elasticity of Demand (PED) and determine if raising the price will increase the total revenue for this good.

The PED is -0.4. Since the demand is inelastic (absolute value < 1), raising the price will increase total revenue.

The demand for petrol is described as inelastic in the short run but more elastic in the long run. Why does this change in elasticity occur over time?

The elasticity of demand for petrol increases over the long run because consumers have more time to adjust their behavior and find alternatives. In the short run, options are limited, but over a longer period, consumers can switch to more fuel-efficient cars, move closer to work, or adopt public transport, making their demand more responsive to price changes.

Microeconomics: Supply, Demand and Elasticity

15 practice questions · 15 flashcards · made from study notes

1 / 15

Terms in this set (15)

According to the law of demand, what is the relationship between the price of a good and the quantity demanded, assuming all other factors remain constant?: As the price rises, the quantity demanded falls.
The statement 'The law of demand results in a downward-sloping demand curve' is a direct consequence of the inverse relationship between price and quantity demanded.: True
According to the law of supply, what is the relationship between the price of a good and the quantity supplied, and what does this imply for the shape of the supply curve?: The law of supply states that as the price of a good rises, the quantity supplied also rises. This positive relationship means the supply curve slopes upward.
The law of supply dictates that the supply curve is upward-sloping.: True
A recent study shows that as people's incomes have risen, the demand for bus travel has decreased, even though the price of a bus ticket has not changed. This scenario illustrates a 'change in demand' rather than a 'change in quantity demanded'.: True
If the price of coffee rises, leading to an increase in the sales of tea, what is the economic term for the change observed in the tea market?: A change in demand
If the price of tea increases, what is the most likely impact on the demand curve for coffee, assuming they are substitute goods?: The demand curve for coffee will shift to the right.
According to the law of supply, an improvement in technology that reduces production costs will cause a 'change in supply' rather than a 'change in quantity supplied'.: True
If the current price of a product is below the market equilibrium price, what is the expected outcome?: A shortage will occur, pushing the price up.
What market condition exists when the price is set above the equilibrium price, and what is the resulting pressure on the price?: A surplus exists, which puts downward pressure on the price.
A government imposes a price ceiling on apartments below the market equilibrium price, a policy known as rent control. What is the direct consequence of this action in the housing market?: A shortage of apartments, as the quantity demanded will exceed the quantity supplied.
A 5% increase in the price of a good leads to a 2% decrease in the quantity demanded. Calculate the Price Elasticity of Demand (PED) and determine if raising the price will increase the total revenue for this good.: The PED is -0.4. Since the demand is inelastic (absolute value < 1), raising the price will increase total revenue.
If a company sells a product for which demand is price elastic, what will be the effect on total revenue if it decides to increase the price?: Total revenue will decrease.
The cross-price elasticity of demand between printers and ink cartridges is found to be negative. What does this indicate about the relationship between these two goods?: They are complement goods.
The demand for petrol is described as inelastic in the short run but more elastic in the long run. Why does this change in elasticity occur over time?: The elasticity of demand for petrol increases over the long run because consumers have more time to adjust their behavior and find alternatives. In the short run, options are limited, but over a longer period, consumers can switch to more fuel-efficient cars, move closer to work, or adopt public transport, making their demand more responsive to price changes.

Practice questions (15)

1.According to the law of demand, what is the relationship between the price of a good and the quantity demanded, assuming all other factors remain constant?
- AAs the price rises, the quantity demanded falls.
- BAs the price falls, the quantity demanded also falls.
- CAs the price rises, the quantity demanded also rises.
- DThere is no relationship between price and quantity demanded.
Show answer
Answer: As the price rises, the quantity demanded falls.
This question directly tests the student's comprehension of the fundamental definition of the law of demand. The law of demand posits an inverse relationship between price and quantity demanded, which is a core concept in microeconomics.
2.The statement 'The law of demand results in a downward-sloping demand curve' is a direct consequence of the inverse relationship between price and quantity demanded.
- ATrue
- BFalse
Show answer
Answer: True
This question requires students to connect the definition of the law of demand to its graphical representation, the demand curve. Understanding this link is crucial for interpreting demand graphs. The downward slope visually represents that as price decreases (moving down the y-axis), quantity demanded increases (moving right on the x-axis).
3.According to the law of supply, what is the relationship between the price of a good and the quantity supplied, and what does this imply for the shape of the supply curve?
Show answer
Answer: The law of supply states that as the price of a good rises, the quantity supplied also rises. This positive relationship means the supply curve slopes upward.
This question directly assesses the student's comprehension of the law of supply and its graphical representation, which is a fundamental concept for understanding market dynamics.
4.The law of supply dictates that the supply curve is upward-sloping.
- ATrue
- BFalse
Show answer
Answer: True
This question checks the student's direct recall of the core principle of the law of supply and its direct consequence on the graphical representation of the supply curve.
5.A recent study shows that as people's incomes have risen, the demand for bus travel has decreased, even though the price of a bus ticket has not changed. This scenario illustrates a 'change in demand' rather than a 'change in quantity demanded'.
- ATrue
- BFalse
Show answer
Answer: True
This question tests the ability to differentiate between a 'change in demand' (a shift of the curve) and a 'change in quantity demanded' (a movement along the curve). A change in income is a demand shifter, causing the entire demand curve for an inferior good like bus travel to shift, which is distinct from a movement along the curve caused by a price change.
6.If the price of coffee rises, leading to an increase in the sales of tea, what is the economic term for the change observed in the tea market?
- AA change in quantity demanded
- BA change in demand
- CA decrease in supply
- DAn increase in quantity supplied
Show answer
Answer: A change in demand
This question requires identifying the correct economic concept. Since the price of a related good (a substitute) changed, it causes a shift in the entire demand curve for tea. This is a 'change in demand,' not a 'change in quantity demanded,' which would be caused by a change in the price of tea itself.
7.If the price of tea increases, what is the most likely impact on the demand curve for coffee, assuming they are substitute goods?
- AThere will be a movement upward along the coffee demand curve.
- BThe demand curve for coffee will shift to the left.
- CThe demand curve for coffee will shift to the right.
- DThere will be a movement downward along the coffee demand curve.
Show answer
Answer: The demand curve for coffee will shift to the right.
This question assesses the student's understanding of how the price of a related good (a substitute) acts as a demand shifter. An increase in the price of tea makes coffee relatively cheaper, thus increasing the quantity of coffee demanded at every price level and shifting the entire demand curve for coffee to the right.
8.According to the law of supply, an improvement in technology that reduces production costs will cause a 'change in supply' rather than a 'change in quantity supplied'.
- ATrue
- BFalse
Show answer
Answer: True
This question tests the student's ability to distinguish between a shift in the supply curve (a 'change in supply') and a movement along it (a 'change in quantity supplied'). Technology is a non-price determinant, or a 'supply shifter'. An improvement in technology allows producers to supply more of a good at every price, which shifts the entire supply curve to the right.
9.If the current price of a product is below the market equilibrium price, what is the expected outcome?
- AA surplus will occur, pushing the price further down.
- BThe demand curve will shift to the left to restore equilibrium.
- CThe supply curve will shift to the right to meet demand.
- DA shortage will occur, pushing the price up.
Show answer
Answer: A shortage will occur, pushing the price up.
This question assesses the student's comprehension of how markets react to disequilibrium. When the price is below equilibrium, demand exceeds supply, creating a shortage. This scarcity incentivizes sellers to raise prices, and buyers to bid prices up, moving the market back toward the equilibrium point. Understanding this mechanism is fundamental to grasping how free markets self-regulate.
10.What market condition exists when the price is set above the equilibrium price, and what is the resulting pressure on the price?
Show answer
Answer: A surplus exists, which puts downward pressure on the price.
This question requires the student to recall and connect two key concepts: the condition created by a price above equilibrium (a surplus) and the market's natural response to it (downward price pressure). This reinforces the core idea that surpluses are self-correcting in a free market as sellers lower prices to clear their excess inventory.
11.A government imposes a price ceiling on apartments below the market equilibrium price, a policy known as rent control. What is the direct consequence of this action in the housing market?
- AA surplus of apartments, as more landlords will want to rent at the controlled price.
- BA shortage of apartments, as the quantity demanded will exceed the quantity supplied.
- CAn increase in the equilibrium price of apartments.
- DNo change in the market, as the price will naturally return to equilibrium.
Show answer
Answer: A shortage of apartments, as the quantity demanded will exceed the quantity supplied.
This question assesses the student's ability to apply the supply and demand model to a real-world policy intervention mentioned in the text. By setting the price below equilibrium, the quantity of apartments demanded by renters will increase, while the quantity supplied by landlords will decrease, leading to a shortage. This directly tests the analysis of price controls on market outcomes.
12.A 5% increase in the price of a good leads to a 2% decrease in the quantity demanded. Calculate the Price Elasticity of Demand (PED) and determine if raising the price will increase the total revenue for this good.
Show answer
Answer: The PED is -0.4. Since the demand is inelastic (absolute value < 1), raising the price will increase total revenue.
This question requires a two-step process: first, calculating the PED as -2%/5% = -0.4, and second, applying the rule that for inelastic goods, an increase in price leads to an increase in total revenue. It connects the calculation of elasticity to its business application.
13.If a company sells a product for which demand is price elastic, what will be the effect on total revenue if it decides to increase the price?
- ATotal revenue will increase.
- BThe effect on total revenue cannot be determined.
- CTotal revenue will remain unchanged.
- DTotal revenue will decrease.
Show answer
Answer: Total revenue will decrease.
When demand is elastic (PED > 1), the percentage decrease in quantity demanded is greater than the percentage increase in price. Therefore, the loss in revenue from selling fewer units will outweigh the gain in revenue from the higher price, causing total revenue to fall.
14.The cross-price elasticity of demand between printers and ink cartridges is found to be negative. What does this indicate about the relationship between these two goods?
- AThey are complement goods.
- BThey are substitute goods.
- CThey are inferior goods.
- DThey are normal goods.
Show answer
Answer: They are complement goods.
This question tests the student's understanding of how cross-price elasticity is used to classify relationships between goods. A negative value specifically indicates that the goods are complements, meaning a price increase in one leads to a demand decrease for the other.
15.The demand for petrol is described as inelastic in the short run but more elastic in the long run. Why does this change in elasticity occur over time?
Show answer
Answer: The elasticity of demand for petrol increases over the long run because consumers have more time to adjust their behavior and find alternatives. In the short run, options are limited, but over a longer period, consumers can switch to more fuel-efficient cars, move closer to work, or adopt public transport, making their demand more responsive to price changes.
This question challenges students to think critically about the factors that determine price elasticity, specifically the role of time. It requires them to apply the concept to a real-world example provided in the text and explain the underlying reasons for the change in consumer responsiveness.

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