Chapter 3 - Demand, Supply, and Market Equilibrium

Question 1

firm

Answer 1

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Question 2

entrepreneur

Answer 2

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

Question 3

households

Answer 3

The consuming units in an economy.

Question 4

product or output

markets

Answer 4

The markets in which goods and services are exchanged.

Question 5

input or factor markets

Answer 5

The markets in which the resources used to produce goods and services are exchanged.

Question 6

labor market

Answer 6

The input/factor market in which households supply work for wages to firms that demand labor.

Question 7

capital market

Answer 7

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

Question 8

land market

Answer 8

The input/factor market in which households supply land or other real property in exchange for rent.

Question 9

factors of production

Answer 9

The inputs into the production process. Land, labor, and capital are the three key factors of production.

Question 10

quantity demanded

Answer 10

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Question 11

demand schedule

Answer 11

A table showing how much of a given product a household would be willing to buy at different prices.

Question 12

demand curve

Answer 12

A graph illustrating how much of a given product a household would be willing to buy at different prices.

Question 13

law of demand

Answer 13

The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.

Question 14

income

Answer 14

The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Question 15

wealth or net worth

Answer 15

The total value of what a household owns minus what it owes. It is a stock measure.

Question 16

normal goods

Answer 16

Goods for which demand goes up when income is higher and for which demand goes down when income is lower

Question 17

inferior goods

Answer 17

Goods for which demand tends to fall when income rises.

Question 18

substitutes

Answer 18

Goods that can serve as replacements for one

another; when the price of one increases, demand for the other increases.

Question 19

perfect substitutes

Answer 19

Identical products

Question 20

complements, complementary goods

Answer 20

Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa.

Question 21

shift of a demand curve

Answer 21

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

Question 22

movement along a demand curve

Answer 22

The change in quantity demanded brought about by a change in price.

Question 23

market demand

Answer 23

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

Question 24

profit

Answer 24

The difference between revenues and costs.

Question 25

quantity supplied

Answer 25

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Question 26

supply schedule

Answer 26

A table showing how much of a product firms will sell at alternative prices.

Question 27

law of supply

Answer 27

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Question 28

supply curve

Answer 28

A graph illustrating how much of a product a firm will sell at different prices.

Question 29

movement along a supply curve

Answer 29

The change in quantity supplied brought about by a change in price.

Question 30

shift of a supply curve

Answer 30

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

Question 31

market supply

Answer 31

The sum of all that is supplied each period by

all producers of a single product.

Question 32

equilibrium

Answer 32

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

Question 33

excess demand or shortage

Answer 33

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

Question 34

excess supply or surplus

Answer 34

The condition that exists when quantity supplied exceeds quantity demanded at the current price.