Chapter 3

Question 1

The supply curve

Answer 1

Upward sloping
Opportunity costs affects

Question 2

The demand curve

Answer 2

Downward sloping
Different affects

Question 3

The equilibrium point

Answer 3

• where the most people are the most happy
• supply and demand C crosses each other
• straight line equation to identify
• price and quantity

Question 4

Straight line equation

Answer 4

Y = kx + m —> P = a + bQ

Question 5

Excess supply

Answer 5

Price flaw - the lowest price for to sell the product
The supply is higher, lower demand

Question 6

Excess demand

Answer 6

Price Ceiling - the highest price to sell the product
The demand is higher, lower supply

Question 7

Adjustment of excess supply

Answer 7

Markets are self-adjusting
Let the market set the price for the product

Question 8

Demand and supply shifts

Answer 8

Endogenous and exogenous

Question 8

Endogenous

Answer 8

A change in the quantity demanded = we mean the change in quantity that people wish to buy that occurs. In response to a change in price
- Q changed because P changed

Question 9

Four simple rules

Answer 9

• An increase in demand will lead to an increase in both the equilibrium price and quantity
  ○ Move curve to the right
• A decrease in demand will lead to a decrease in both the equilibrium price and quantity
  ○ Move curve to the left
• An increase in supply will led to a decrease in the equilibrium price and an increase in the equilibrium quantity
  ○ Move curve to the right
• A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity
  Move curve to the left

Question 10

Exogenous

Answer 10

If we talk about a change in demand we mean that people want to buy more of a certain item, even fi the price stays unchanged -
- Q changed, either upwards or downwards, but P does not change

Question 11

Cost-benefit P Demand curve

Answer 11

benefit = buyers reservation price
cost = actual amount the buyer must pay

Question 12

Demand C - vertical interpretation

Answer 12

Change the axis for price and quantity

Question 13

Supply curve - Low hanging fruit principle

Answer 13

If we expand the production, we turn first to those whose opportunity cost of producing the product is lowest, and only then to others with a higher opportunity cost

Question 14

Supply - Horizontal interpretation

Answer 14

Begin with a price and go over to the supply curve to read the quantity that sellers wish to sell at that price on their horizontal axis.

Question 15

Supply- Vertical interpretation

Answer 15

Begin with a quantity and then go up to the supply curve to read the corresponding marginal cost on the vertical axis.

Question 16

Sellers reservation price

Answer 16

the smallest dollar amount for which she would not be worse off if she sold an additional unit

Question 17

When is a system in equilibrium?

Answer 17

when all forces at work within the system are canceled by others, resulting in a balanced or unchanging situation.

Question 18

When is a market in equilibrium?

Answer 18

when no participant in the market has any reason to alter his or her behavior, so that there is no tendency for production or prices in that market to change

Question 19

Cash on the table principle

Answer 19

Means a transaction can not take place unless the buyer’s reservation price for the good exceeds the seller’s reservation price - When these meet both parts get economic surplus