Chapter 3

Question 1

Demand Curve

Answer 1

downward sloping and indicated the level of benefit the buyer (think he/she) will obtain

Question 2

Supply Curve

Answer 2

upward sloping and measures the cost of producing something for the seller

Question 3

price is the guiding force in a market economy

Answer 3

answers the questions how much (what),
how and for whom things are produced

Question 4

How to determine the amount of a surplus or shortage in a supply and demand graph, and predict
what will happen to correct the market (bring it back to equilibrium)

Answer 4

Surplus:
-Q supplied > Q demanded, and the price is above equilibrium.
- horizontal distance between supply curve & demand curve at a price above equilibrium
-To eliminate, decrease price
Shortage:
- Q demanded > Q supplied, and the price is below the equilibrium.
-horizontal distance between the demand curve and supply curve at a price below equilibrium
-to eliminate increase price

Question 5

Demand curves and supply curves do not shift in reaction to changes in a good’s own price.

Answer 5

• movements along the curve
• called a change in the quantity demanded or quantity supplied.
• Something must be causing the price to change.
• Demand ex. price of gas increase due to higher costs of oil production
• Supply ex. buy more gas in preparation for “bad weather”

Question 6

A change in demand or a change in supply (a shift of the entire curve)

Answer 6

• caused by a specific event impacting the benefit of buyers or the cost of suppliers
• creates the need for market price to change so that a new equilibrium can be reached

Question 7

How to determine the effects on price and quantity when either one or both of supply and/or
demand shift left or right. This includes the uncertain effects of simultaneous shifts.

Answer 7

Demand:
- Preference (M.B)
- Income:
normal: Income increases Demand shifts right
inferior good: Income increases Demand shifts left
- Price of related goods:
Substitutes: 1 increases, demand for 2 shifts right
Complements: 3 decreases, demand for 5 shifts right

Supply:
- Cost of production:
tech, availability of resources, competition (# of sellers)
MC increases, Supply curve shifts left

Question 8

What price control is, the difference between a price floor and a price ceiling, and know which
one causes a surplus and which one causes a shortage.

Answer 8

Price control: Government-mandated minimum or maximum prices for goods or services
Price floor:
- min. price set above the equilibrium price
- helps producers of certain goods/services
ex. minimum wage for labor
- causes a surplus, Q supplied > Q demanded

Price ceiling:
- max price set below the equilibrium price
- Makes essential goods/services more affordable for consumers
ex. rent control
- causes a shortage, Q demanded> Q supplied