Test Questions Chapter 1,3,4 EconExplain the Law of Increasing Opportunity Cost.Each move along the PPC curve bears a greater opportunity cost than the move before it. The reason for this is that with the first move, you allocate the least efficient resources from the production of one product to the other. As you move along the curve, you begin to allocate your more efficient resources for producing the first product to producing the second product. What is elasticity? Price elasticity of demand? Price elasticity of supply?Elasticity is a products responsiveness to change. Price elasticity of demand deals with how much the quantity demanded of a product changes as the price increase. Price elasticity of supply deals with how much the quantity supplied of a product changes as the price increases.What are the three characteristics that determine elasticity? Number of alternatives, amount in budget, time to respond.Is the demand curve steeper if the demand is elastic or inelastic?Inelastic. As the price changes, the quantity demanded changes a very verylittle.Define Opportunity Cost.Opportunity cost is the value of the next best thing that you give up to make your choice.What determines demand shifts?Exogenous factors: Income, price of related goods (substitutions, compliments), expected FV, taste/preferencesWhat determines supply shifts?Exogenous factors: Technology, cost of production, number of sellers- New technology, lowers cost, and more sellers shifts supply curve rightEquilibrium..? Quantity demanded= quantity supplied. The allocation of goods is the most efficient it can be. Law of increasing opportunity cost effect me personally?I can watch TV or study. If I reallocate one hour of studying to TV watching, it’s not a big deal because I wasn’t going to be efficient studying at that hour anyhow. If I begin to reallocate more hours of studying to hours of TV watching, I begin dipping into my more efficient study time, making the opportunity costbigger and bigger (the grade that I will get gets lower and lower). Shifts PPC to right/left?Improved technology, increased productivity, increased workforce, increased resources: all shifts right. How does a capitalistic country decide where to be?Tradition, market, government. Mostly market: price decides via opportunity cost and interactions between buyers and sellers.4 factors of production?Land, labor, capital, entrepreneurship, Reasons that demand curve slopes downwards?Common sense, income effect, law of diminishing marginal utilityWhat shifts the supply curve?Increased technology, decreased cost of productionHow does P1 go up to P2 and Q1 go up to Q2 when the demand is higher than the supply?At P1, the demand exceeds the quantity supplied. When you increase the price to P2, you can produce more quantity and start filling the gap betweensupply and demand until you reach the price and quantity combination which intersects the demand curve.New technology was created to produce pizza faster and for less cost. Explain the effect on Price and Quantity.There will be a greater quantity supplied for a lower price. The price of pizza went down from $10 to $8. Why did this happen?At P1 ($10), the quantity supplied was greater than the quantity demanded. The supply curve was shifted left so that the quantity supplied now meets the quantity demanded at P2
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