1. Which of the following is an assumption of the market model?
2. What causes a movement along the demand curve rather than a shift?
3. If the price elasticity of demand for a good is greater than 1, what does this imply?
What are the main assumptions of the market model?
The market model assumes many buyers and sellers, perfect information for all participants, identical goods as perfect substitutes, self-interested behavior with protected property rights, and free entry and exit in markets.
How does the demand curve relate to the law of demand, and what causes it to shift or move along?
The demand curve slopes downward, illustrating the law of demand: as price increases, quantity demanded decreases. Movements along the curve are caused by price changes; shifts are driven by factors like income, tastes, related goods, and expectations.
What is price elasticity of demand, and how does it influence total revenue when prices change?
Price elasticity of demand measures responsiveness of quantity demanded to price changes, calculated as %ΔQd / %ΔP. If demand is elastic (>1), increasing price decreases total revenue; if inelastic (<1), increasing price raises total revenue.
Market equilibrium — definition?
Supply equals demand at this point.
Demand curve — slope?
Downward sloping.
Supply curve — slope?
Upward sloping.
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