Chapter 3 Supply and Demand: Theory

Question 1

Demand

Answer 1

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

Question 2

Market

Answer 2

Any place- physical or virtual- people come together to trade

Question 3

Law of Demand

Answer 3

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

P increases, Qd decreases or P decreases, Qd increases, ceteris paribus

Question 4

Four ways to represent the laws of demand

Answer 4

words
symbols
demand schedule
demand curve

Question 5

Demand Schedule

Answer 5

he 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 6

Demand Curve

Answer 6

The graphical representation of the law of demand.

Question 7

Law of Diminishing Marginal Utility

Answer 7

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 8

Individual demand curve

Answer 8

An individual demand curve
represents the price-quantity
combinations of a particular good for a single buyer.

Question 9

Market demand curve

Answer 9

A market demand curve
represents the price-quantity
combinations of a good for all buyers; the curve is derived by “adding up” individual demand
curves.

Question 10

Change in demand = Shift in demand curve

Answer 10

− Increase in demand = Rightward shift in the
demand curve
− Decrease in demand = Leftward shift in the
demand curve

Change in quantity demanded = a
movement from one point to another
point on the same demand curve that
is caused by a change in the price of
the good.

Question 11

Income (normal good)

Answer 11

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

Question 12

Income (inferior good)

Answer 12

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

Question 13

Income (neutral good)

Answer 13

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

Question 14

Prices Related to Goods

Answer 14

− Substitutes: Two goods that
satisfy similar needs or desires.
− Complements: Two goods that
are used jointly in consumption.

Question 15

Supply

Answer 15

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

Question 16

Law of Supply

Answer 16

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 17

(Upward Sloping) Supply Curve

Answer 17

The graphical representation of the
law of supply.
* Most supply curves are upward
sloping
− Fundamental reason is law of
diminishing marginal returns,
discussed in a later chapter.

Question 18

Factors that cause the supply curve shift

Answer 18

Prices of Relevant Resources
* Technology
* Prices of Other Goods
* Number of Sellers
* Expectations of Future Price
* Taxes and Subsidies
* Government Restrictions

Question 19

Surplus (excess supply)

Answer 19

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

Question 20

Shortage (excess demand)

Answer 20

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

Question 21

Equilibrium

Answer 21

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.
− Price falls when there is a surplus and rises when there is a shortage.

Question 22

Equilibrium (quantity)

Answer 22

The quantity that corresponds to the equilibrium price.
The quantity at which the amount of the good that 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 23

Equilibrium (Market-Clearing Price)

Answer 23

he price at which Qd=Qs

Question 24

Consumers Surplus (CS)

Answer 24

he difference
between the maximum price a buyer is willing
and able to pay for a good or service and the
price actually paid.
(CS = Maximum buying price - Price paid)

Question 25

Producers (sellers) surplus (PS)

Answer 25

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 26

Total Surplus (TS)

Answer 26

The sum of consumers’ surplus and producers’ surplus.
Total Surplus = Consumers’ Surplus + Producers’ Surplus