chapter 4

Question 1

what is demand

Answer 1

buyers willingness and ability to purchase a certain good or service

Question 2

what is the law of demand

Answer 2

(other things equal), quantity demanded falls when price of good rises, visa versa, inverse relationship, only applies to one product at a time

Question 3

what is the law of supply

Answer 3

(other things equal) quantity supplied of good rises when price of the good rises, direct relationship

Question 4

surplus versus shortage

Answer 4

surplus: quantity exceeds demand
shortage: quantity demanded is greater than supplied

Question 5

what is a market

Answer 5

group of buyers and sellers and its institution or arrangement by which they trade

Question 6

what is perfect competition

Answer 6

many buyers and sellers, sellers and buyers are price takers

Question 7

what is a monopoly

Answer 7

one seller, buyers are price takers

Question 8

what is a price taker

Answer 8

individual or company that must accept the prices in a market due to a lack of influence on the market price

Question 9

what is a demand schedule

Answer 9

table, shows the relationship between price of good and quanitity demanded

Question 10

what is a demand curve

Answer 10

graph that shows the relationship between price of good and quantity demanded

Question 11

what is a normal good

Answer 11

increase in income leads to an increase in demand

Question 12

what is an inferior good

Answer 12

an increase in income leads to a decrease in demand

Question 13

what is a substitute

Answer 13

increase in the price of one good increases the demand of the other

Question 14

what is a complement

Answer 14

increase in the price of one leads to a decrease in the demand for the other

Question 15

income

Answer 15

normal good: increase in income leads to increase in demand, shifts D to the right
inferior good: increase in income leads to decrease in demand, shifts D to the left

Question 16

price of related goods

Answer 16

substitutes if increase in price of one leads to the increase in the demand for the other
complements if fall in price of one raises the demand for another good
*represented by movement along the curve

Question 17

tastes (trends)

Answer 17

anything which causes a shift in taste toward a good will increase demand, shift the D curve to the right

Question 18

expectations about the future

Answer 18

expected increase in income leads to increase in current demand
expected higher prices leads to increase in current demand

Question 19

number of buyers

Answer 19

increase, market demand increases, shifts curve

Question 20

advertisements / announcements

Answer 20

increase the demand, shift curve

Question 21

supply schedule

Answer 21

table showing relationship between price of good and quantity supplied

Question 22

supply curve

Answer 22

shows relationship between price of good and quantity supplied, change is represented by movements along supply curve

Question 23

variables that can shift the supply curve

Answer 23

input prices, technology, expectations, number of sellers

Question 24

input prices

Answer 24

supply negatively related to prices of inputs, fall makes production more profitable at each output price, firm supply larger quantity at each price, S curve shifts right

Question 25

technology

Answer 25

determines how many inputs are required to produce a unit of output
cost-saving shifts S to right

Question 26

number of sellers

Answer 26

increase in seller’s increases quantity, shifts curve right
(increase supply = right, decrease in supply =left)

Question 27

expectations about the future

Answer 27

sellers may adjust supply according to expectations of the future

Question 28

equilibrium

Answer 28

intersection of supply and demand curve

Question 29

external shock

Answer 29

e.g. extreme drought, changes equilibrium quantity and shifts curve

Question 30

how to analyze changes in equilibirum

Answer 30

1. decide whether event shifts supply, demand, or both curves
2. decide shift left or right
   use diagram to see of how sift affects price and quantity