Chapter 4 - Demand, Supply, and Markets

Question 1

Demand

Answer 1

A relation between the price of a good and the quantity that consumers are willing and able to buy.

Question 2

Law of Demand

Answer 2

The quantity of a good that customers are willing and able to buy per period relates inversely to the price.

Question 3

Substitution Effect of a Price Change

Answer 3

When the price of a good falls, that good becomes cheaper compared to other goods so consumers tend to substitute that good for others.

Question 4

Money Income

Answer 4

The number of dollars received per period

Question 5

Real Income

Answer 5

Income measured in terms of the goods and services it can buy. (fluctuates w/price)

Question 6

Income Effect of a Price Change

Answer 6

A fall in the price of a good increases consumers’ real income, making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

Question 7

Demand Curve

Answer 7

Negative graph of price vs quantity

Question 8

Normal Good

Answer 8

A good (Ex: new clothes) where demand increases, or shifts right, as consumer income rises.

Question 9

Inferior Good

Answer 9

A good (Ex: used clothes) where demand decreases, or shifts left, as consumer income rises.

Question 10

Substitutes

Answer 10

Goods, (Ex: Coke & Pepsi) that are related in such a way that an increase in the price of one shifts the demand for the other rightward.

Question 11

Complements

Answer 11

Goods, (Ex: Oreos & milk) that are related in such a way that an increase in the price of one shifts demand for the other leftward.

Question 12

Tastes

Answer 12

Consumer preferences

Question 13

Shift vs Movement (Demand curve)

Answer 13

Change in price = Movement

Change in a determinant of demand other than price
= Shift

Question 14

Supply

Answer 14

A relation between the price of a good and the quantity that producers are willing and able to sell.

Question 15

Law of Supply

Answer 15

The amount of a good that producers are willing and able to sell is usually directly related to its price.

Question 16

Supply Curve

Answer 16

Positive curve showing quantity supplied vs price.

Question 17

Quantity Supplied

Answer 17

The amount offered for sale per period at a particular price.

Question 18

Shift vs Movement (Supply)

Answer 18

Change in quantity supplied resulting from a change in the price of the good = Movement

Change in one of the determinants of supply other than price of the good = Shift

Question 19

Transaction Costs

Answer 19

Costs of time and info required to carry out a market exchange.

Question 20

Surplus

Answer 20

When quantity supplied exceeds quantity demanded.

Question 21

Shortage

Answer 21

When quantity demanded exceeds quantity supplied.

Question 22

Equilibrium

Answer 22

When quality supplied is the same as quality demanded.

Question 23

Shifts of Demand Curve

Answer 23

Increase in money for consumers
Increase in price of substitute
Change in consumer expectations
Growth in # consumers
Change in consumer taste

Question 24

Shifts of Supply Curve

Answer 24

Technological breakthrough
Reduction in price of resource needed for production
Decline in price of another good
Change in expectations encouraging producers to produce more
Increase in # production facilities

Question 25

Disequilibrium

Answer 25

The condition that exists in a market when the plan of buyers do not match those of sellers; a temporary mismatch between quantity supplied and quantity demanded as the market seeks equilibrium.

Question 26

Price Floor

Answer 26

A minimum legal price below which a product cannot be sold. To have an effect, price floors have to be set at equilibrium price. (Milk, Ag. Products)

Question 27

Price Ceiling

Answer 27

A maximum legal price above which a product cannot be sold. Price ceilings must be set below equilibrium to be effective. (Rent Control)