Chapter 3 - Supply And Demand

Question 1

What is a market

Answer 1

A market is any arrangement that enables buyers and sellers to get information and do business with eachother

Question 2

What is a competitive market

Answer 2

A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price

Question 3

What is the money price

Answer 3

The money price of a good is the amount of money needed to buy it

Question 4

What is the relative price of a good

Answer 4

It is the ratio of its money price to the money price of the next best alternative good
The relative price of a good is ITS OPPORTUNITY COST.

Question 5

What is a want

Answer 5

Wants are the unlimited desires or wishes people have for goods and services

Question 6

What does demand reflect

Answer 6

Demand reflects a decision about which wants to satisfy

Question 7

If you demand something, you…

Answer 7

Want it
Can afford it, and
Have made a definite plan to buy it

Question 8

The quantity demand of a good or service is…

Answer 8

The amount that consumers plan to buy during a particular time period, at a particular time

Question 9

The Law of Demand

Answer 9

Other things remaining the same, the higher the price of a good, the smaller the quantity demanded
And
The lower the price of a good, the larger the quantity demanded

Question 10

Why does a change in the price change the quantity demanded?

Answer 10

Substitution income,

Income effect

Question 11

What is Substitution Effect in terms of the law of demands?

Answer 11

When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases.

Question 12

What is the Income Effect in terms of the law of demand?

Answer 12

When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demand of the good or service decreases.

Question 13

What does the term DEMAND refer to:

Answer 13

the entire relationship between the price of the good and the quantity demanded of the good.

Question 14

What does the demand curve show

Answer 14

It shows the relationship between the quantity demanded of a good and its price when all other influences on consumers’ planned purchases remain the same.

Question 15

A rise in price =

Answer 15

Other things remaining the same, brings a Decrease in QUANTITY DEMANDED (movement up along demand curve)

Question 16

A fall in the price =

Answer 16

With all other things remaining the same, brings an increase in QUANTITY DEMANDED and a movement DOWN along the demand curve

Question 17

Demand curve is also a…

Answer 17

Willingness and ability to pay curve

Marginal benefit curve —> willingness to pay measures marginal benefit

Question 18

The smaller the quantity available,

Answer 18

The higher the price is that someone is willing to pay for another unit

Question 19

Willingness to pay measures

Answer 19

Marginal benefit

Question 20

When does a change in demand occur?

Answer 20

When some influence on buying plans other than the price of the good changes, there is a change in demand for that good.

Question 21

When demand increases…

Answer 21

The demand curve shifts right wards

Question 22

When demand decreases

Answer 22

The curve shifts left

Question 23

What are the six main factors that change demand?

Answer 23

• the prices of related goods
• expected future prices
• income
• expected future income and credit
• population
• preferences

Question 24

1. Prices of related goods (in relation to factors that change demand)

Answer 24

When the price of a substitute for an item rises or when the price of a complement of an item falls, the demand for item increases

Question 25

A substitute is

Answer 25

A good that can be used in place of another good

in relation to prices of related goods - factors that change demand

Question 26

A complement is

Answer 26

A good that can be used in conjunction with another good

in relation to prices of related good from factors that change demand

Question 27

2.Expected Future Prices (in relation to factors that change demand)

Answer 27

If the price of a good is expected to rise in the future, the current demand for the good increases and the demand curve shifts right

Question 28

3. Income (in relation to factors that change demand)

Answer 28

When income increases consumers buy more of most goods and the demand curve shifts rightward

Question 29

A normal good is

Answer 29

one where the demand increases as income increases

Question 30

An inferior good is

Answer 30

a good for which demand decreases as income increases

Question 31

4. Expected Future Income and Credit (in relation to factors that change demand)

Answer 31

When income is expected to increase in the future or when the credit is easy to obtain, the demand might increase now.

Question 32

5. Population (in relation to factors that change demand)

Answer 32

The larger the population, the greater is the demand for all the goods

Question 33

6. Preferences (in relation to factors that change demand)

Answer 33

People with the same income have different demands if they have different preferences

Question 34

to calculate relative price in terms of two goods

Answer 34

divide price of one good by the price of the other

divide coffee price by tea price to get the relative price of coffee in terms of tea