Econ Ch 3

Question 1

law of demand

Answer 1

there is an inverse (negative) relationship between the price of a good and the quantity that buyers are willing to purchase

Results in a downward sloping curve

Question 2

why inverse relationship

Answer 2

price up,, buy less
price down, buy more

Question 3

deriving the demand curve

Answer 3

be able to

Question 4

what does the height represent of the demand curve

Answer 4

the max price that consumers are willing to pay for an additional unit

Question 5

consumer surplus

Answer 5

the difference between the maximum amount consumers would be willing to pay and the amount that they actually pay
area below curve but above price
area of a triangle
willing to pay - cost

Question 6

consumer surplus cannot be negative because

Answer 6

cost !> willingness because then no one will buy it

Question 7

change in quantity demanded

Answer 7

a movement along the curve

Question 8

what causes a change along the curve

Answer 8

a change in the current price of that good

Question 9

increase in quantity demanded vs decrease in quantity demanded

Answer 9

increase- down the curve (to the right)

decrease - up the curve (to the left)

Question 10

change in demand

Answer 10

a shift of the curve

Question 11

what causes change in the shift of the curve

Answer 11

a change in anything that affects your desire to buy the good other than the current price of the good

Question 12

increase vs decrease in demand

Answer 12

increase - curve shifts right

decrease - curve shifts left

Question 13

shifters in demand

Answer 13

1. change in consumer income
   normal goods- income up, demand up
   inferior foods - income up, demand down
2. change in number of consumers
   consumers up, demand up
3. change in the price of a related good
   substitutes - substitute increases, demand of other increases
   compliments - price of one up, the demand of the other decreases
4. change in expectations
   expected change in price- price to go up, current demand up
   expected change in income- income to go up, current demand increases
5. change in consumer tastes and preferences
   - taste and preference go up, demand goes up

Question 14

law of supply

Answer 14

there is a direct (positive) relationship between the price of a good or service and the amount that suppliers are willing to produce

• as price increases, the quantity supplied increases
• mind of the seller

Question 15

what does the height of the supply curve represent

Answer 15

the minimum price necessary to induce producers to supply that additional unit

Question 16

producer surplus

Answer 16

the difference between the minimum price suppliers is willing to accept and the price they actually receive

pay - want

Question 17

change in quantity supplied

Answer 17

a movement along the curve

Question 18

what causes a change in a movement along the curve

Answer 18

a change in the current price of that good

Question 19

increase in quantity supplied vs decrease in quantity supplied

Answer 19

increase - movement up the curve -right

decrease - movement down the curve - left

Question 20

change in supply

Answer 20

a shift of the curve

Question 21

what causes a shift of the curve

Answer 21

anything that affects your desire to produce and sell the good other than the current price of the good

Question 22

increase in supply vs decrease in supply

Answer 22

increase - curve shifts right

decrease - curve shifts left

Question 23

shifters of supply

Answer 23

1. a change in resource price
   price of resource up, supply less
2. a change in technology
   more tech, more supply
3. changes in nature or politics
   depends
4. changes in taxes
   taxed more, do less, supply less

Question 24

inelastic

Answer 24

change in quantity are not sensitive to change in price (inelastic curves are steeper)

Question 25

elastic

Answer 25

change in quantity are sensitive to change in the price (elastic curves are flatter)

Question 26

perfectly inelastic

Answer 26

not sensitive to change at all vertical line

Question 27

perfectly elastic

Answer 27

lots of substitutes

Question 28

market equilibrium

Answer 28

A state in which the conflicting forces of supply and demand are in balance Occurs when the demand curve intersects the supply curve

Question 29

in market equilibrium...

Answer 29

All trades that generate more benefit than costs are undertaken - before equilibrium No trade where costs exceed benefits are undertaken - after equilibrium The combined area of consumer and producer surplus

Question 30

efficient

Answer 30

no excess supply or excess demand

Question 31

excess supply

Answer 31

quantity supplied > quantity demanded to fix: lower price and lower supply to go to equilibrium

Question 32

excess demand

Answer 32

quantity demanded > quantity supplied To fix: supply more and increase price

Question 33

changes in demand to equilibrium

Answer 33

Demand changes: Price - movies in the same direction Quantity - movies in the same direction Demand increases, pierce and quantity increases

Question 34

changes in supply to equilibrium

Answer 34

Supply changes: Price- moves in opposite direction Quantity- moves in the same direction Supply increases, price decreases, quantity increases

Question 35

change to both demand and supply

Answer 35

Procedure for solving double shift questions: Take it one statement at a time and ask yourself: Does this affect supply or demand Does it make it go up or down What happens to price and quantity Repeat steps a, b, and c for the 2nd statement Add the effects together - example on notes

Question 36

invisible hand principle

Answer 36

The tendency for people, while pursuing their own interests, to promote the economic well-being of society 1. prices communicate information 2. prices coordinate the actions of market participants and motivate economics players