Chapter 3 - Where prices come from: the interaction of demand and supply

Question 1

Consumer Sovereignty

Answer 1

In a market system, consumers ultimately determine which goods and services will be produced.

Question 2

When discussing demand

Answer 2

we are considering, not what a consumer wants to buy, but what the consumer is both WILLING AND ABLE to buy.

Question 3

Demand schedules

Answer 3

A table showing the relationship between the price of a product and the quantity of product demanded.

Question 4

Quantity demanded

Answer 4

The amount of good or service that a consumer is willing and able to purchase at a given price.

Question 5

Demand curve

Answer 5

A curve that shows the relationship between the price of a product and the quantity of the product demanded.

Question 6

Market demand

Answer 6

The demand by all the consumers of a given good or service.

Question 7

Law of demand

Answer 7

Holding everything else constant, when the price of a product falls, the quantity demanded will increase. And when the price of a product rises, the quantity demanded will decrease.

Question 8

Ceteris Paribus (all else being equal)

Answer 8

The requirement that when analysing the relationship between two variables, such as price and quantity demanded - other variables must be held constant.

Question 9

Substitution effect

Answer 9

The change in the quantity demanded of a good or service that results from a change in price, making the good or service more or less expensive relative to other goods or services that are substitutes.

Question 10

Income effect

Answer 10

The change in the quantity demanded of a good or service that results from the effect of a change in price on consumer purchasing power.

Question 11

The substitution & income effect

Answer 11

happen simultaneously when a price changes.

Question 12

A shift in a demand curve

Answer 12

is an increase or decrease in demand.

Question 13

A movement along a demand curve

Answer 13

is an increase or decrease in the quantity demanded.

Question 14

Variables that influence market demand

Answer 14

1. Income
2. Prices of related goods.
3. Tastes
4. Population
5. Expected future prices

Question 15

Normal good

Answer 15

A good or service for which the demand increases as income rises and decreases as income falls. I.e. Kombucha

Question 16

Inferior good

Answer 16

A good or service for which the demand increases as income falls and decreases as income rises. I.e. Ice clothing

Question 17

Law of supply

Answer 17

Holding everything else constant, an increase in the price of a product causes and increase in the quantity supplied, and the decrease of the price of a product causes a decrease in the quantity supplied.

Question 18

The most important variables that shift market supply

Answer 18

Prices of inputs
Technological changes
Prices of substitutes in production
Number of firms in the market
Expected future prices

Question 19

Technological change

Answer 19

A change in the ability of a firm to produce output with a given quantity of inputs.

Question 20

Productivity

Answer 20

The output produced per unit of input.

Question 21

Market equilibrium

Answer 21

A situation in which quantity demanded equals quantity supplied.

Question 22

Competitive market equilibrium

Answer 22

A market equilibrium with many buyers and many sellers.

Question 23

Surplus

Answer 23

A situation in which the quantity supplied is greater than the quantity demanded.

Question 24

Shortage

Answer 24

A situation in which the quantity demanded is greater than the quantity supplied.