Chapter 3

Question 1

When taking an exam:

Answer 1

it’s always easier to start with the easier questions and then go back and do the more difficult ones (that way you don’t run out of time to get the exam done by doing the difficult ones first)

Question 2

Competitive market

Answer 2

A. Market in which there are many buyers and sellers of the same good or service.
B. **Key Feature: No individual’s actions have a noticeable effect on the price at which a good or service is sold.

Question 3

Supply and Demand Model

Answer 3

describes a competitive market’s behavior

Question 4

5 Elements of Supply and Demand Model

Answer 4

1. The demand curve
2. The supply curve
3. The set of factors that cause the demand curve to shift and those that cause the suply curve to shift
4. The market equilibrium, which includes the equilibrium price and quantity
5. The way the market equilibrium changes when the supply curve or demand curve shifts

Question 5

Demand schedule

Answer 5

Shows how much of a good/service consumers will want to buy at different prices

Question 6

Example in book: Purchase of cotton by the lb

Answer 6

Demand schedule shows that as price of cotton /lb increases, the “quantity demanded” or actual amount consumers are willing to buy at some specific price, falls.

Question 7

Demand Curve

Answer 7

shows the graphical representation of the demand schedule (the relationship between quantity demanded and price) **Almost always slopes downward: a higher price reduces the quantity demanded.

Question 8

“Law” of Demand

Answer 8

A higher price for a good/service, other things equal, leads people to demand a smaller quantity of that good/service.

Question 9

5 principle factors that Shift the Demand Curve

Answer 9

Change in:

1. prices of related goods/services
2. income
3. tastes
4. expectations
5. number of consumers

Question 10

Substitutes

Answer 10

1. a pair of goods are substitutes if a rise in the price of one good (jeans) makes consumers more willing to buy the other good (khakis);
2. usually goods that serve a similar function

Question 11

Complements

Answer 11

1. goods are complements when the rise in the price of one good makes consumers less willing to buy another good
2. usually goods that are consumed together (cars, gas)

Question 12

Change in income

Answer 12

1. when individuals have more income, they are more likely to purchase a good at any given price
2. the demand for normal goods increases when consumer income rises
3. demand for inferior goods decreases as income increases

Question 13

Changes in tastes

Answer 13

People have certain preferences or tastes in what they consume and these tastes change; tastes influenced by marketing and advertising

Question 14

Changes in # of consumers

Answer 14

1. demand usually increases when population increases

2. decreases when pop. decreases

Question 15

5 principle factors that affect the supply curve

Answer 15

Changes in:

1. input prices
2. prices of related goods/services
3. technology
4. expectations
5. number of producers

Question 16

Change in input price

Answer 16

An input is any good/service used to produce another good/service.
An increase in input price makes final price increase

Question 17

Change in price of related good/service

Answer 17

1. Demand for a good decreases if the price for a substitute increases and vice versa
2. Demand for a good increases if the price for a complement good increases and vice versa.

Question 18

Change in technology

Answer 18

Supply usually increases if technology improves

Question 19

Change in expectations

Answer 19

An increase in the anticipated future price of a good/service reduces supply today and vice versa

Question 20

Change in number of producers

Answer 20

supply increases when # of producers increases

Question 21

Equilibrium price

Answer 21

every buyer willing to pay that price finds a seller willing to sell at that price

Question 22

surplus

Answer 22

an excess of supply of a good/service

Question 23

shortage

Answer 23

an excess demand for a good/service

Question 24

simultaneous shifts in supply/demand

Answer 24

1. when demand increases and supply decreases, the equilibrium price rises but change in equilibrium quantity is ambiguous
2. when demand decreases and supply increases, the equil. price falls but the change in equil. quantity is ambiguous
3. when both demand and supply increase, equil. quantity rises, change in equil. price is ambiguous
4. when both demand and supply decrease, equil. quantity falls, change in equil. price is ambiguous.

Question 25

competitive vs non-competitive markets

Answer 25

Competitive (wheat: the ? is whether the extra wheat can be sold at a price high enough to justify the extra production cost; the farmer needn’t worry about producing more wheat will affect the price of the wheat that he was already planning to grow.)
Non-competitive (aluminum: only a few producers, the ? is whether producing more aluminum will drive down the market price and reduce the company’s profit.)

Question 26

Perfectly competitive market model

Answer 26

1. All goods are exactly the same
2. Buyers and sellers are so numerous that no one can affect the market price; each person is a “price taker”.
3. We assume markets are perfectly competitive to better understand supply and demand.