Chapter 3

Question 1

The demand curve-

Answer 1

• A schedule or graph showing the quantity of a good that buyers wish to buy at each price.
  
  • It is generally downward-sloping with respect to price.
    ○ As the price of a good or service goes down, the quantity that consumers wish to buy will increase.
    ○ As the price of a good or service increases, the quantity consumers wish to buy will decrease.

Question 2

This shows how the price decreases, the quantity increases for the amount of sales.
Why is this?

Answer 2

Substitution effect:
- The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.
Income effect:
- The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.
- Allowing customers to save more money—> Higher purchasing power: more purchasing.
Buying 5 or 6 things on sale for a total of $400 compared to buying 2 or 3 full price items for a total of $300.

Question 3

Buyer’s reservation price

Answer 3

• The largest amount of money a buyer would be willing to pay for a unit of a good.
  
  • If the reservation price exceeds the market price, the consumer will purchase the good.
  • The higher the cost of an item, the more the company has to play around with the price.
    If the price of an item is $20,000 and it increases to $22,000, a consumer would be more willing to pay that in comparison to an item which costs $1 increasing to $4.

Question 4

The supply curve:

Answer 4

• A curve or schedule that displays the quantity of a goods that sellers wish to sell at each price.
  
  • It is generally upward-sloping with respect to price.
  • The seller charges a higher price for additional units in order to cover the higher opportunity costs of each additional unit.

Question 5

Market equilibrium-

Answer 5

• At the intersection of demand and supply.
  
  • All buyers and sellers are satisfied with their respective quantities at the prevailing market price.
    No tendency for the system to change.

Question 6

Equilibrium price

Answer 6

Equilibrium price- price at which a good will sell.

Question 7

Equilibrium quantity

Answer 7

Equilibrium quantity- quantity supplied and quantity demanded are equal.

Question 8

Excess supply

Answer 8

Excess supply- the amount of which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price.

Question 9

Excess demand

Answer 9

Excess demand- the amount of which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price.

Question 10

Change in quantity demanded

Answer 10

Change in quantity demanded- a movement along the demand curve that occurs in response to a price change.

Question 11

Change in demand

Answer 11

Change in demand- a shift of the entire demand curve: A demand change at the same price.

Question 12

Change in the quantity supplied

Answer 12

Change in the quantity supplied- a movement along the supply curve that occurs in the response to a price change.

Question 13

Change in supply

Answer 13

Change in supply- a shift of the entire supply curve: a supply change at the same price.

Question 14

Shifts in demand-
These are due to complements:

Answer 14

• Two goods are complements in consumption if an increase/ decrease in the price of one causes a leftward/ rightward shift in the demand curve for the other.

Question 15

Shifts in demand:
These are due to substitutes:

Answer 15

• Two goods are substitutes in consumption if an increase/decrease in the price of one causes a rightward/ leftward shift in the demand curve for the other.

Question 16

Shifts in demand-
Income changes:

Answer 16

• Normal good:
  Demand shifts rightwards/leftwards when the incomes of buyers increase/ decrease.

Question 17

Shifts in demand-
Income changes:

Answer 17

• Inferior good
  ○ Demand shifts leftwards/ rightwards when the incomes of buyers increases/ decreases.

Question 18

Shifts in supply:

Answer 18

• The supply curve is based on the costs of production.
  ○ Therefore, anything that affects the costs of production would shift the supply curve in accordance with the shift in price.
  ○ Other factors such as the number of sellers may affect the supply curve.

Question 19

Buyers surplus

Answer 19

Buyers surplus- the difference between the buyers reservation price and the price actually paid.

Question 20

Sellers surplus

Answer 20

Sellers surplus- the difference between the price received by the seller and the lowest price she is willing to sell at.

Question 21

Total surplus

Answer 21

The sum of buyer’s surplus and the seller’s surplus

Question 22

When is a market equilibrium efficient:

Answer 22

• When all costs of producing the good or service are borne directly by the seller.
  
  • When all benefits from the good or service accrue directly to buyers.

Question 23

When is a market equilibrium inefficient:

Answer 23

• When some costs of production fall on people other than those who sell the good or service, the market equilibrium is inefficient.
  ○ A valued example would include pollution- many factories produce huge emissions of carbon which negatively affects the environment, and leads to the marginal cost being underestimated- which is the cost to society.

Question 24

Price elasticity of demand-

Answer 24

• A measure of the responsiveness of the quantity demanded of a good or change in the price of that good.
  
  • The percentage change in the quantity demanded that results from a 1 percent change in its price.
    Percentage change in quantity demanded / percentage change in price

Question 25

When Price Elasticity of Demand is
(Give the different options with 1).

Answer 25

• > 1 we call it elastic
  • =1 we call it unit elastic
  • <1 we call it inelastic

Question 26

Determinants of demand price elasticity:

Answer 26

• Substitution possibilities
  
  • Budget share- if it makes up a tiny portion of your budgeting, this would not change much with a price increase.
  • Time- consumers can change their purchasing patterns over time.