Econ Ch. 3-4 Test Flashcards
States that people tend to receive less and less addition satisfaction from any good or service as they obtain more and more of it during a specific period of time
Principle of Diminishing marginal utility
of units of a product that will be bought at a given price, amount of something not only wanted, but also purchased
Demand
States that everything else being held constant, the lower the price charged for a good or service, the greater the demand; the higher the price, the lower the demand
Law of Demand
T/F Demand Curve goes top left to bottom right
True
Prices serve to…. (3 things)
1) Transfer Information
2) Provide Incentives
3) Circulate Income
T/F In a free market, prices are unspoken agreements between buyers and seller
True
Situation where the change in price of an item causes a change in the demand (movement occurs along the previously established curve)
Change in quantity demanded
Shifting of a demand curve when demand for an item increases or decreases regardless of price (whole curve shifts left or right)
Change in Demand
4 things that can change demand
1) Change in people’s income
2) Price of related goods
3) Change in people’s taste
4) Change in expectations
Increase in demand moves a curve to the…
right
Decrease in demand moves the curve to the…
left
Items for which demand typically increase when buyers income increases
Normal goods (ex. cars, movies, clothes)
items that typically experience a decrease in demand as buyers income increases
Inferior goods (ex. off brand, ramen noodles)
Items that resemble one another and may be used in place of eachother
Substitute Goods (ex. Dasani and Great Value, BK and McDonald’s, Pepsi and Coke)
Items usually purchased/used together
Complementary Goods (ex. ketchup and mustard, PB & J, hot dogs and buns, cereal and milk)
Compromise between buyer and seller (expensive enough for Business to make money, cheap enough for consumer to buy)
Market Price
Amount of goods/services business firms are willing and able to provide at different prices
Supply
The higher the price buyers are willing to pay, other things constant, the greater the quantity of a product a firm will produce; the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce
Law of Supply
Which way does a supply curve go?
Bottom left to top right
Change in price consumers are willing to pay, causes a change in the number of goods made and sold (causes movement along curve)
Change in quantity supplied
Business firm produces more or less despite price (causes whole curve to shift left or right)
Change in Supply
Things that cause supply to change (3)
1) Change in Technology
2) Change in production cost
3) Change in price of related goods
(see notes for examples)
Point at which consumers are willing to purchase from market the exact quantity of a product suppliers put in (point where the market is happy :))
Market Equilibrium
Price where market equilibrium occurs
Market Equilibrium Price
Excess of unsold products, occurs when supplier raises prices above market equilibrium
Surplus
3 solutions to a surplus
1) Increase Demand
2) Decrease Supply
3) Allow price to fall to market equilibrium point
When government buys surplus commodities to raise prices it results in a
price floor (barrier intended to prevent prices of items from falling below market price)
When various factors hold price of a good below market equilibrium
Shortage
Does not allow certain prices to go above market equilibrium
Price Ceiling (if the ceiling holds the price too low for too long, it suffocates profit, and businesses die)
3 solutions to a shortage
1) decrease demand
2) increase supply
3) allow prices to raise to market equilibrium point
