Macroeconomics - Ch 3

Question 1

Demand

Answer 1

Schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time (other things equal)

Question 2

Demand Schedule/curve

Answer 2

Graph showing price and quantity’s inverse relationship (as price declines, people buy more); downward slope reflects law of demand

Question 3

Law of demand

Answer 3

Inverse relationship between price and quantity demand

Question 4

Diminishing marginal utility

Answer 4

Consumption subject to this; successive units of a particular product yield less and less marginal utility; consumers will only buy additional units if the price is progressively reduced

Question 5

Income Effect

Answer 5

A lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of the product than before; higher price has the opposite effect

Question 6

Substitution Effect

Answer 6

At a lower price, buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive (product whose price has fallen is now a better deal relative to other products)

Question 7

Determinants of demand (demand shifters)

Answer 7

Factors affecting purchases other than price these = other things equal; when determinants change, curve shifts to the left or right; basic ones: (1) Consumers’ tastes/preferences (2) # of buyers in the market (3) consumers’ incomes (4) prices of related goods (5) consumer expectations

Question 8

Normal goods (superior goods)

Answer 8

Products whose demand varies directly with money income; most products fall into this category

Question 9

Inferior goods

Answer 9

Goods whose demand varies inversely with money income

Question 10

Substitute Good (substitutes in consumption)

Answer 10

One that can be used in place of another good

Question 11

Complementary Good (complements)

Answer 11

One that is used together with another good

Question 12

Independent Goods

Answer 12

Vast majority of goods that are not related to one another; change in the price of one has little or no effect on the demand for the other

Question 13

Increase in demand

Answer 13

Due to favorable change in consumer tastes, increase in # of buyers, rising incomes (normal goods), falling incomes (inferior goods), increase in the price of a substitute good, decrease in the price of a complementary good, new consumer expectation that either prices or income will be higher in the future; reverse these to explain decrease in demand

Question 14

Change in Quantity Demanded

Answer 14

Movement from one point to another point (from one price-quantity combo to another) on a fixed demand curve; cause = increase/decrease in price

Question 15

Supply

Answer 15

Schedule/curve showing the various amounts of a product that producers are willing/able to make available for sale at each of a series of possible prices during a specific period; supply schedule tells us (other things equal) firms will produce and offer for sale more of their product at a high price than at a low price (price represents revenue)

Question 16

Law of Supply

Answer 16

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls

Question 17

Marginal cost

Answer 17

The added cost of producing one more unit of output

Question 18

Supply curve

Answer 18

Upward slope reflecting the law of supply; positive/direct relationship between price & quantity

Question 19

Determinants of Supply (supply shifters)

Answer 19

(1) Resource prices (2) Technology (3) Taxes & Subsidies (4) Prices of other goods (5) Producer expectations (6) # of sellers in the market; change in one of these shifts the entire curve right or left

Question 20

Change in supply

Answer 20

Change in the schedule, shift of the curve

Question 21

Change in quantity supplied

Answer 21

Movement from one point to another on a fixed supply curve

Question 22

Equilibrium price (market-clearing price)

Answer 22

Price where the intentions of buyers and sellers match (quantity demanded = quantity supplied)

Question 23

Equilibrium quantity

Answer 23

Quantity at which the intentions of buyers and sellers match

Question 24

In equilibrium

Answer 24

a market in balance, or at rest

Question 25

Surplus

Answer 25

Excess supply; drives prices down

Question 26

Shortage

Answer 26

Excess demand; drives prices up

Question 27

Productive Efficiency

Answer 27

the production of any particular good in the least costly way

Question 28

Allocative Efficency

Answer 28

the particular mix of goods and services most highly valued by society (minimum-cost production assumed)

Question 29

MB=MC

Answer 29

Marginal benefit = marginal cost at the intersection of the demand and supply curves (allocative efficiency results)

Question 30

Price ceiling

Answer 30

sets the maximum legal price a seller may charge for a product or service (ex. rent control, usury laws- limits rent, interest)

Question 31

Black markets

Answer 31

product illegally bought/sold above legal limits

Question 32

Price floor

Answer 32

minimum price fixed by the government; invoked when society feels the free functioning of the market system has not provided a sufficient income for certain groups of resource suppliers or producers (Ex. agricultural products, minimum wages)

Question 33

Increase in demand ______ equilibrium price and quantity; a decrease in demand ______ equilibrium price and quantity

Answer 33

Increases; decreases

Question 34

Increase in supply ______ equilibrium price but ______ equilibrium quantity; a decrease in supply ______ equilibrium price but _______ equilibrium quantity

Answer 34

reduces; increases

increases; reduces