Chapter 3 - Supply And Demand: Theory

Question 1

Market

Answer 1

Any place people come together to trade

Question 2

Demand

Answer 2

The willingness and ability of buyers to purchase different qualities of a good at different prices during a specific period.

Question 3

Law of Demand

Answer 3

As the price of a good rises, the quantity demanded of the good falls, and is the price of a good falls, the quantity demanded of the good rises, ceteris paribus.

Question 4

Demand schedule

Answer 4

The numerical tabulation of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand.

Question 5

Demand curve

Answer 5

The graphical representation of the law of demand. 

Question 6

Law of diminishing marginal utility

Answer 6

Over a given period, the marginal (or additional) utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases.

Question 7

Own Price

Answer 7

The price of a good.

Question 8

Normal good

Answer 8

A good for which demand rises (Falls) as income rises (falls).

Question 9

Inferior good

Answer 9

A good for which demand falls (rises) as income rises (falls).

Question 10

Neutral good

Answer 10

A good for which demand does not change as income rises or falls.

Question 11

Substitutes

Answer 11

Two goods that satisfy similar needs or desires.

Question 12

Complements

Answer 12

Two goods that are used jointly and consumption.

Question 13

Supply

Answer 13

The willingness and ability of sellers to produce an offer to sell different quantities of a good at different prices during a specific period. 

Question 14

Law of supply

Answer 14

As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity supplied of the good falls, ceteris paribus.

Question 15

(Upward – sloping) supply curve

Answer 15

The graphical representation of the law of supply. 

Question 16

Supply schedule

Answer 16

The numerical tabulation of the quantity supplied of a good at different prices. Supply schedule is the numerical representation of the law of supply.

Question 17

Subsidy

Answer 17

A monetary payment by government to a producer of a good or service.

Question 18

Surplus (Excess supply)

Answer 18

A condition in which the quantity supplied is greater than the quantity demanded. Surpluses occur only at prices above the equilibrium price.

Question 19

Shortage (excess demand)

Answer 19

A condition in which the quantity demanded is greater than the quantity supplied. Shortages occur only at prices below the equilibrium price.

Question 20

Equilibrium price (Market – clearing price)

Answer 20

The price at which the quantity demanded of a good equals the quantity supplied.

Question 21

Equilibrium quantity

Answer 21

The quantity that corresponds to the equilibrium price. The quantity at which the amount of the good the buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold.

Question 22

Disequilibrium price

Answer 22

A price other than the equilibrium price. A price at which the quantity demanded does not equal the quantity supplied.

Question 23

Disequilibrium

Answer 23

A state of either surplus or shortage in a market.

Question 24

Equilibrium

Answer 24

Equilibrium means ‘at rest’. Equilibrium in a market is the price-quantity combination from which buyers or sellers do not tend to move away. Graphically, equilibrium is the intersection point of the supply and demand curves.

Question 25

Consumers surplus (CS)

Answer 25

The difference between the maximum price a buyer is willing and able to pay for a good or service and the price actually paid. 

Question 26

Producers (sellers) surplus (PS)

Answer 26

The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. (PS = price received - minimum selling price)

Question 27

Total surplus (TS)

Answer 27

The sum of consumers surplus and producers surplus. (TS = CS + PS)

Question 28

Spontaneous order

Answer 28

The spontaneous and unintended emergency of order out of the self interested actions of individuals; and unintended consequence of human action, with emphasis placed on the word “unintended “.