Chapter 3

Question 1

What is quantity demanded?

Answer 1

The amount that the household/consumer wants to purchase given the price of the good.
e.g. how many cans of coke do you want to buy given the price of the can of coke?

Question 2

What is the law of demand?

Answer 2

There is an inverse relationship between price and quantity demanded.
So when price goes down, quantity demanded increases.

Question 3

Why is the demand curve downward sloping?

Answer 3

It’s the reason for the law of demand which is:

1. the substitution effect
2. the income effect
3. the Law of diminishing marginal utility

Question 4

What is the Substitution effect? (reason for law of demand)

Answer 4

Changes in price motivate consumers to buy relatively cheaper substitutes goods.
E.g. if price of milk increases the quantity demanded decreases because people are going to find substitute products to milk

Question 5

What is the Income effect? (reason for law of demand)

Answer 5

Changes in price affect the purchasing power of consumers’ income.
E.g. when the price of milk goes down, the purchasing power increases as people are able to buy more. Or, if the price for milk goes up, people are going to stop buying more milk because the PP decreased.

Question 6

What is the Law of Diminishing Marginal Utility? (reason for law of demand)

marginal = additional
utility = satisfaction

Answer 6

As you continue to consume a given product, you will eventually get less additional utility (satisfaction) from each unit you consume.
E.g. if you are hungry an apple offers pretty high value. But, the more you consume, the less hungry you get making each additional apple less valuable.

Question 7

A change in price moves _____ the demand curve.

Answer 7

along

Question 8

If something else other than price changes it will ____ the demand curve. (either right or left)

Answer 8

shift.
due to increase or decrease in demand.
e.g. milk causes baldness so curve will shift to the left as demand will decrease.

Question 9

What are the 5 shifters of demand?

causes the demand curve to shift

Answer 9

1. Tastes/Preferences
2. Number of Consumers
3. Price of related goods (substitutes and compliments)
4. Income
5. Expectations

Question 10

How would tastes/preferences cause the demand curve to shift?

Answer 10

E.g. if study came out and said milk makes kids smarter if they drink it every morning, the demand would increase so the demand curve would shift to the right

Question 11

How would number of consumers cause the demand curve to shift?

Answer 11

E.g. more customers coming to town would increase the demand for milk

Question 12

How would price of related goods cause the demand curve to shift?

Answer 12

E.g. almond milk and regular milk are substitutes for each other, cereal compliments milk. So, if price goes down for regular milk, demand would increase for almond milk. If price goes up for cereal, the demand for milk will decrease so will shift curve to the left.

Question 13

How would income cause the demand curve to shift?

Answer 13

Depends on the type of product. There’s either normal goods or inferior goods.

Normal goods = income and the demand for the product are directly related. demand increases when income increases. you demand more of it because your income increased.

Inferior goods = Income and the demand for the product are inversely related.

Question 14

How would expectations cause the demand curve to shift?

Answer 14

If you think price of milk will increase next week you are going to buy a lot of milk now. If you think milk will decrease you are going to wait to buy more then.

Question 15

When there is a change in demand the price _______

Why is there a change in demand?

Answer 15

stays the same

Because of the 5 shifters

Question 16

What happens to the demand for a product when the price decreases?

Answer 16

Demand stays the same, but the quantity demanded increases.

Question 17

What changes the quantity demanded?

Answer 17

the Price. (moves along the curve)

Question 18

What changes the demand?

Answer 18

the 5 shifters. (moves the entire curve)

Question 19

What is the Law of supply?

Answer 19

There is a direct relationship between price and quantity supplied
E.g. when the price for milk increases, the quantity producers make will increase.

Question 20

A supply curve is ______ sloping

Answer 20

upward.

when the price increases, the quantity supplied increases

Question 21

When there is a change in price, it moves _____ the supply curve

Answer 21

along

Question 22

What are the 5 shifters of supply?

Answer 22

1. Price of resources
2. Number of producers
3. Technology
4. Tax and Subsidies
5. Expectations

Question 23

How would price of resources cause the supply curve to shift?

Answer 23

If there was an increase in the price of dairy cows the supply of milk would decrease causing a shift to the left.

Question 24

How would the number of producers cause the supply curve to shift?

Answer 24

If there was an increase in the number of dairy farmers, the supply of milk would increase causing a shift to the right.

Question 25

How would technology of producers cause the supply curve to shift?

Answer 25

New advanced milking machines would cause the supply for milk to increase causing a shift to the right.

Question 26

How would tax and subsidies cause the supply curve to shift?

Answer 26

A subsidy is when the government wants firms to produce more so they give them money to produce more output. This would increase the supply, causing the curve to shift to the right.

A tax would take away producers’ money and since they don’t have money to produce stuff, the supply would decrease and the curve would shift to the left.

Question 27

How would expectations cause the supply curve to shift?

Answer 27

If a producer thinks they can make more profit on their products a few weeks from now, they’ll hold back supply now and supply later on.

Question 28

What happens to the supply for a product when the price increases?

Answer 28

Supply stays the same, but the quantity supplied increases.

Question 29

What changes the quantity supplied?

Answer 29

Price.

moves along the curve

Question 30

What changes the supply?

Answer 30

The 5 shifters

moves the entire curve

Question 31

When does equilibrium happen?

Answer 31

When the quantity demanded = the quantity supplied

Question 32

What is a surplus?

Answer 32

When the quantity supplied is greater than the quantity demanded.

Question 33

What is a shortage?

Answer 33

When the quantity demanded is greater than the quantity supplied.

Question 34

What is quantity supplied?

Answer 34

The amount of goods or service the producer wants to sell given the own price of the actual good.

Question 35

What happens if the quantity supplied is greater than the quantity demanded?

Answer 35

Inventories rise, signal to seller to drop price

Question 36

What happens if the quantity supplied is less than the quantity demanded?

Answer 36

Inventories fall, signal to seller to raise price

Question 37

For D and S analysis it is the ______ price that matters

Answer 37

relative

Question 38

What is relative price?

Answer 38

The ratio of the money price of one product to the money price of another product; that is, a ratio of two absolute prices.