Chapter 3-Demand, Supply, and Market Equilibrium

Question 0

Law of Demand

Answer 0

The principle that, other things equal, an increase in a product’s price will reduce the quantity of it demanded, and conversely for a decrease in price.

Question 1

Demand

Answer 1

A schedule showing the amounts of a good or service that buyers (or a buyer) wish to purchase at various prices during some time period.

Question 2

Diminishing Marginal Utitily

Answer 2

In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or utility) from each successive unit of the product consumed.

Question 3

Income Effect

Answer 3

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.

Question 4

Substitution Effect

Answer 4

(1) A change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product’s price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.

Question 5

Demand Curve

Answer 5

A curve illustrating demand.

Question 6

Determinants of Demand

Answer 6

Factors other than price that determine the quantities demanded of a good or service.

Question 7

What are the determinants of demand?

Answer 7

• Change in buyer tastes
• Change in number of buyers
• Change in income
• Change in the price of a related good (substitute or complementary)
• Change in consumer expectations

Question 8

Normal Goods

Answer 8

A good or service whose consumption increases when income increases and falls when income decreases, price remaining constant.

Question 9

Inferior Goods

Answer 9

A good or service whose consumption declines as income rises, prices held constant.

Question 10

Substitute Good

Answer 10

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

Question 11

Complementary Good

Answer 11

Products and services that are used together. When the price of one falls, the demand for the other increases (and conversely).

Question 12

Change in Demand

Answer 12

A movement of an entire demand curve or schedule such that the quantity demanded changes at every particular price; caused by a change in one or more of the determinants of demand.

Question 13

Change in Quantity Demanded

Answer 13

A change in the quantity demanded along a fixed demand curve (or within a fixed demand schedule) as a result of a change in the price of the product.

Question 14

Supply

Answer 14

A schedule showing the amounts of a good or service that sellers (or a seller) will offer at various prices during some period.

Question 15

Law of Supply

Answer 15

The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease.

Question 16

Supply curve

Answer 16

A curve illustrating supply.

Question 17

Determinants of Supply

Answer 17

Factors other than price that determine the quantities supplied of a good or service.

Question 18

What are the determinants of supply?

Answer 18

1. Change in Resource Prices
2. Change in Technology
3. Changes in taxes and subsidies
4. Changes in prices of goods
5. Changes producer expectations
6. Changes in number of suppliers

Question 19

Change in Supply

Answer 19

A movement of an entire supply curve or schedule such that the quantity supplied changes at every particular price; caused by a change in one or more of the determinants of supply.

Question 20

Change in Quantity Supplied

Answer 20

A change in the quantity supplied along a fixed supply curve (or within a fixed supply schedule) as a result of a change in the product’s price.

Question 21

Equilibrium Price

Answer 21

The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.

Question 22

Equilibrium Quantity

Answer 22

(1) The quantity at which the intentions of buyers and sellers in a particular market match at a particular price such that the quantity demanded and the quantity supplied are equal; (2) the profit-maximizing output of a firm.

Question 23

Surplus

Answer 23

The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

Question 24

Shortage

Answer 24

The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.

Question 25

Productive Efficiency

Answer 25

The production of a good in the least costly way; occurs when production takes place at the output at which average total cost is a minimum and marginal product per dollar’s worth of input is the same for all inputs.

Question 26

Allocative Efficiency

Answer 26

The apportionment of resources among firms and industries to obtain the production of the products most wanted by society (consumers); the output of each product at which its marginal cost and price or marginal benefit are equal, and at which the sum of consumer surplus and producer surplus is maximized.

Question 27

Price Ceiling

Answer 27

A legally established maximum price for a good or service

Question 28

Price Floor

Answer 28

A legally determined minimum price above the equilibrium price