Chapter 3: Demand, Supply, and Market Equilibrium

Question 1

What does the demand curve tell us?

Answer 1

The different amounts of a product that consumers are willing and able to purchase at different possible prices holding other factors constant (BASICALLY THE RELATIONSHIP BETWEEN QUANTITY DEMANDED AND PRICE)

Question 2

What is a consumers’ willingness to consume determined?

Answer 2

preferences which can be affected by advertising, consumption trends, and seasonality

Question 3

What determines ability to consume?

Answer 3

Economic factors like income, price of good, prices of related goods

Question 4

Reservation price

Answer 4

Maximum price that a comsumer is willing to pay for the good at different quantity levels (MB)

Question 5

The law of demand

Answer 5

demand curve is downward sloping, suggesting an inverse relationship between price of the good and quantity demanded

Question 6

according to the law of demand as price falls….

Answer 6

quantity demanded rises

Question 7

according to the law of demand as price rises….

Answer 7

quantity demanded decreases

Question 8

What does a change in quantity demanded mean?

Answer 8

There is a change in the price of the good itself and involves an upward or downward movement along a given demand curve

Question 9

What does a change in demand mean?

Answer 9

There is a change in one or more of the demand shifters currently being held constant and involves an outward or inward shift of the demand schedule

Question 10

Substitution effect

Answer 10

As one things becomes more expensive, a consumer may switch to another related product

Question 11

Income effect

Answer 11

As the price of something increases, the consumer’s purchasing power is reduced lowering the amount they can afford

Question 12

6 demand shifters

Answer 12

consumer income
prices of substitute goods
prices of complementary goods
tastes and preferences
number of consumers in the market
expected future price of the good in question

Question 13

Normal Goods

Answer 13

Demand increases or decreases directly with the income change

Question 14

Inferior goods

Answer 14

Demand increases or decreases inversely with income

Question 15

What determines a substitute?

Answer 15

An increases in price of a good will cause an increase in demand for the other . A decrease in the price of one wil cause a decrease in demand for the other

Question 16

What determines a complement?

Answer 16

An increase in price of one will cause a decrease in the demand for the other and a decrease in the price of one will cause an increase in demand for the other

Question 17

Tastes and Preferences

Answer 17

a favorable change in consumer preferences for a product means more of it will be demanded at each price, shifting demand curve to the right

Question 18

Number of buyers

Answer 18

An increase in the number of buyers in a market increases product demand, shifting the demand curve to the right

Question 19

Expected prices

Answer 19

A newly formed expectation of a higher price in the future may cause consumers to buy now in order to “stock up” thus shifting the current demand to the right

Question 20

What the supply curve?

Answer 20

Gives the relationship between quantity supplied and price of the good in question

Question 21

Marginal cost and the supply curve

Answer 21

Tells us the minimum prices that a producer must receive to be incentivized to supply a unit of the good at different quantity levels (producers reservation price

Question 22

Law of supply

Answer 22

Curve is upward sloping,, suggesting that there is a direct relationship between price of the good and quantity supplied

Question 23

According to LOS, as the price falls….

Answer 23

quantity supplied falls

Question 24

According to LOS, as the price rises….

Answer 24

quantity supplied rises

Question 25

Why does the supply curve slope upward?

Answer 25

The opportunity cost of production increases as more of the good is produced

Question 26

7 Supply Shifters

Answer 26

Resource or input prices
Alternative output prices
Expected Prices of the good in question
Technology
Taxes and subsidies
The number of producers in the market
Weather, labor strikes, etc

Question 27

Rationing function of prices

Answer 27

The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent

Question 28

Price Ceiling

Answer 28

Sets the maximum legal price a seller may charge for a product

Question 29

What happens when the price ceiling is set below equilibrium price

Answer 29

Said to be binding, causing a shortage

Question 30

What happens when price ceiling is above the equilibrium price?

Answer 30

Said to be non-binding….no effect on the market

Question 31

How to distribute a product that has persistent shortage

Answer 31

Ration coupons

Black Markets

Question 32

Ration coupons

Answer 32

authorize coupon bearers to purchase a fixed amount of gas per month

Question 33

Black markets

Answer 33

gas is illegally bought and sold at prices above the legal limits

Question 34

Price Floor

Answer 34

Minimum legal price set by the government

Question 35

What happens when a price floor is above equilibrium price?

Answer 35

said to be binding, it will cause a surplus

Question 36

How to cope with product surplus?

Answer 36

Supply control
Demand Expansion
Government purchase