ECON 340 FINAL STUDY EXAM
GUIDE DETAILED QUESTIONS AND
EXPERT ANSWERS
1. What are the main determinants of demand?
● Answer: The main determinants of demand are:
○ Price of the good or service: As the price increases, the quantity demanded
typically decreases (law of demand).
○ Income of consumers: Higher income generally increases demand for normal
goods, while it decreases demand for inferior goods.
○ Prices of related goods: This includes substitutes (goods that can replace each
other) and complements (goods that are consumed together).
○ Consumer preferences: Changes in tastes or preferences can increase or
decrease demand.
○ Expectations: If consumers expect future prices to rise, they may increase
current demand.
○ Number of buyers: More buyers increase overall market demand.
2. Explain the concept of price elasticity of demand and its significance.
● Answer: Price elasticity of demand measures how responsive the quantity demanded is
to a change in price. It is calculated as the percentage change in quantity demanded
divided by the percentage change in price. The significance lies in:
○ Elastic Demand (> 1): Consumers are highly responsive to price changes; a
small change in price leads to a large change in quantity demanded.
○ Inelastic Demand (< 1): Consumers are less responsive to price changes;
quantity demanded changes little with a price change.
○ Unitary Elastic Demand (= 1): Percentage change in quantity demanded equals
the percentage change in price.
○ Understanding elasticity helps businesses set prices and governments forecast
the impact of taxation on revenue.
3. What are the characteristics of perfect competition?
● Answer: Characteristics of perfect competition include:
○ Many buyers and sellers: No single buyer or seller can influence the market
price.
○ Homogeneous products: The goods offered by all sellers are identical.
GUIDE DETAILED QUESTIONS AND
EXPERT ANSWERS
1. What are the main determinants of demand?
● Answer: The main determinants of demand are:
○ Price of the good or service: As the price increases, the quantity demanded
typically decreases (law of demand).
○ Income of consumers: Higher income generally increases demand for normal
goods, while it decreases demand for inferior goods.
○ Prices of related goods: This includes substitutes (goods that can replace each
other) and complements (goods that are consumed together).
○ Consumer preferences: Changes in tastes or preferences can increase or
decrease demand.
○ Expectations: If consumers expect future prices to rise, they may increase
current demand.
○ Number of buyers: More buyers increase overall market demand.
2. Explain the concept of price elasticity of demand and its significance.
● Answer: Price elasticity of demand measures how responsive the quantity demanded is
to a change in price. It is calculated as the percentage change in quantity demanded
divided by the percentage change in price. The significance lies in:
○ Elastic Demand (> 1): Consumers are highly responsive to price changes; a
small change in price leads to a large change in quantity demanded.
○ Inelastic Demand (< 1): Consumers are less responsive to price changes;
quantity demanded changes little with a price change.
○ Unitary Elastic Demand (= 1): Percentage change in quantity demanded equals
the percentage change in price.
○ Understanding elasticity helps businesses set prices and governments forecast
the impact of taxation on revenue.
3. What are the characteristics of perfect competition?
● Answer: Characteristics of perfect competition include:
○ Many buyers and sellers: No single buyer or seller can influence the market
price.
○ Homogeneous products: The goods offered by all sellers are identical.
