Module 3 - Key Words

Question 1

what is Ceteris Paribus?

Answer 1

This is a Latin term for ‘other things being equal’.

The idea is that, when we compare two economic outcomes, we are trying to hold all variables constant so are comparing ‘apples to apples’

Question 2

What do economists consider complements?

Answer 2

Goods that are often used together so that consumption of one good tends to enhance consumption of the other.

For instance, we tend to think that food is a complement to drinks since we tend to consume both at the same time.

Question 3

What is demand?

Answer 3

Demand is the relationship between price and the quantity demanded of a certain good or service.

Refers to the entire schedule of prices and quantity demanded.

Question 4

What is quantity demand?

Answer 4

refers to how much a consumer would be willing and able to purchase at a certain price.

Question 5

What does the demand curve show?

Answer 5

a graphical representation of the relationship between price and quantity demanded of a certain good or service, with quantity on the horizontal axis and the price on the vertical axis.

It plots the demand schedule.

Typically, demand curves will be downward sloping.

Question 6

What is a demand schedule?

Answer 6

The demand schedule is a table that shows a range of prices for a certain good or service and the quantity demanded at each price.

Question 7

What is equilibrium?

Answer 7

Equilibrium is the situation where the market is ‘at rest’ so that, unless there is some external shock, the market will remain unchanged.

For demand-supply, equilibrium is where quantity demanded (Qd) is equal to the quantity supplied (Qs).

The equilibrium is the combination of price and quantity (P and Q) where there is no economic pressure from surpluses or shortages that would cause price or quantity to change.

Question 8

What is the equilibrium price?

Answer 8

This is the market price where quantity demanded (Qd) is equal to the quantity supplied (Qs). It implies that the market will not need to adjust since there is no internal pressure to change.

Question 9

What is the equilibrium quantity?

Answer 9

This is the market quantity at which quantity demanded (Qd) is equal to the quantity supplied (Qs) are equal for a certain price level.

Question 10

What is an excess demand?

Answer 10

Excess demand occurs when, at the existing price, the quantity demanded exceeds the quantity supplied;

also called a shortage.

Question 11

What is an excess supply?

Answer 11

at the existing price, quantity supplied (QS) exceeds the quantity demanded (Qd);

also called a surplus quantity.

Question 12

What are factors of production?

Answer 12

the resources such as labor (L), materials (T), and machinery (K) that are used to produce goods and services.

also called inputs

Generally, the more of each input, the more output is generated

Question 13

What is an inferior good?

Answer 13

a good or service in which the quantity demanded (Qd) falls as income rises.

Conversely, in which quantity demanded rises (Qd) as income falls.

We tend to eat more steak and less hamburger with higher incomes. There
is nothing inherently wrong with inferior goods. We just have access to higher quality foods at higher incomes.

Question 14

What are inputs?

Answer 14

resources such as labor, materials, and machinery that are used to produce goods and services

Question 15

What is the law of demand?

Answer 15

the common relationship that a higher price
leads to a lower quantity demanded (Qd) of a certain good or service.

Conversely, a lower price leads to a higher quantity demanded, while all
other variables (such as income and preferences) are held constant.

Graphically, the demand curve is downward sloping.

Question 16

What is the law of supply?

Answer 16

the common relationship that a higher price
leads to a greater quantity supplied (Qs).

Conversely, a lower price leads to a lower quantity supplied, while all other variables (such as input costs and technology) are held constant

Question 17

What is a normal good?

Answer 17

A normal good is a good or service in which the quantity demanded (Qd) rises as income rises (and, conversely, in which quantity demanded falls as income falls).

Most goods that we purchase are normal goods.

Question 18

What is price?

Answer 18

This is the dollar amount that a buyer pays for one unit of the specific good or service.

Generally, it is the price you would see on a store shelf.

Question 19

What is a price ceiling?

Answer 19

A price ceiling is a legal maximum price that sellers can charge for a good or service.

For instance, the Canadian government place an upper limit of 60% per annum on what lenders can charge for loans (section 347 of the Criminal Code). However, ‘Payday Loans’ are exempt from this law.

Question 20

What is a price control?

Answer 20

Price controls are government laws that regulate prices instead of letting market forces solely determine prices. Often price controls are to ensure that prices stay within some bounds.

Question 21

What is a price floor?

Answer 21

a legal minimum price. Firms are not permitted to charge below a certain price.

For instance, the Province of BC has a ‘minimum on-premise drink price’ that sets a minimum price that bars can charge patrons for alcohol.

Question 22

What is quantity demanded?

Answer 22

Quantity Demanded (Qd) is the total number of units of a good or service
consumers are willing to purchase at a given price.

As you change the price, quantity demanded will change.

Question 23

What is quantity supplied?

Answer 23

Quantity Supplied (Qs) is the total number of units of a good or service producers are willing to sell at a given price.

Generally, the higher the price, the higher the quantity supplied.

Question 24

What is a shift in demand?

Answer 24

occurs when a change in some economic factor (other than price) causes a different quantity to be demanded at every price.

For instance, a rise in income will tend to change the quantity demanded even if prices have not changed.

Question 25

What is a shift in supply?

Answer 25

occurs when a change in some economic factor (other than price) causes a different quantity to be demanded at every price.

For instance, rising energy prices will tend to force firms to reduce output even if prices did not change.

Question 26

What is a shortage?

Answer 26

A shortage occurs when, at the existing price, the quantity demanded exceeds the quantity supplied. This is also called excess demand.

Question 27

What is a substitute?

Answer 27

a good that can replace another to some extent, so that greater consumption of one good can mean less of the other.

For instance, chicken and beef are considered substitutes.

Question 28

What is supply?

Answer 28

the relationship between price and the quantity supplied of a certain good or service.

Supply refers to the entire schedule of prices and quantity supplied. Quantity supplied refers to how much a firm would be willing and able to sell at a certain price

Question 29

What is a supply curve?

Answer 29

a line that shows the relationship between price and quantity supplied on a graph, with quantity supplied on the horizontal axis and price on the vertical axis. It plots the supply schedule.

Typically, supply curves will be upward sloping.

Question 30

What is a supply schedule?

Answer 30

a table that shows a range of prices for a good or service and the quantity supplied at each price