Chapter 3

Question 1

law of demand

Answer 1

there is an inverse relationship between the price of a good or service and the quantity of it that consumers are willing to purchase

Question 2

change in quantity demanded

Answer 2

along the demand curve; due to price

Question 3

change in demand

Answer 3

shift in demand curve; due to changes in consumer income, change in the number of consumers, change in the price of a related good, changes in expectations, demographic changes, changes in consumer tastes

Question 4

elastic vs. inelastic demand

Answer 4

elastic: a change in price leads to a relatively large change in quantity demanded; inelastic: a change in price leads to only a small change in quantity demanded

Question 5

consumer surplus

Answer 5

the difference between the maximum amount consumers would be willing to pay and the amount they actually pay for a good

Question 6

law of supply

Answer 6

there is a direct relationship between the price of a good or service and the amount of it that suppliers are willing to produce

Question 7

elastic vs. inelastic supply

Answer 7

elastic: the quantity supplied is sensitive to changes in price; inelastic: the quantity supplied is not very sensitive to changes in price (ex. physician services)

Question 8

producer surplus

Answer 8

the difference between the amount a supplier actually receives and the minimum price required to include the supplier to produce the given units

Question 9

market response to increase in demand

Answer 9

both price and quantity increase

Question 10

market response to decrease in demand

Answer 10

both price and quantity decrease

Question 11

market response to increase in supply

Answer 11

price decreases, quantity increases

Question 12

market response to decrease in supply

Answer 12

price increases, quantity decreases

Question 13

market equilibrium

Answer 13

1. the one price where plans of every buyer and seller can be carried out
2. the equilibrium price will not change until a new force acts (new market information is revealed) stable
3. consumer and producer surplus is maximum

Question 14

invisible hand principle

Answer 14

the tendency of market prices to channel the actions of self-interested individuals into activities that promote the prosperity of society

Question 15

what is the efficiency of market organization dependent on?

Answer 15

(1) competitive markets and (2) well-defined and enforced private-property rights