Principles of Economics Chapter 3

Question 1

firm

Answer 1

An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

Question 2

entrepreneur

Answer 2

A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful
business.

Question 3

households

Answer 3

The consuming units in an economy.

Question 4

product or output markets

Answer 4

The markets in which goods and services are exchanged.

Question 5

input or factor markets

Answer 5

The markets in which the resources used to produce goods and services are exchanged.

Question 6

labor market

Answer 6

The input/factor market in which households supply work for wages to firms that demand labor.

Question 7

capital market

Answer 7

The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

Question 8

land market

Answer 8

The input/factor market in which households supply land or other real property in exchange for rent.

Question 9

factors of production

Answer 9

The inputs into the production process. Land, labor, and capital are the three key factors of production.

Question 10

Input and output markets are connected through

Answer 10

the behavior of both firms and
households. Firms determine the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied.

Question 11

A household’s decision about what quantity of a particular output, or product, to demand depends on a number of factors, including:

Answer 11

 The price of the product in question.
 The income available to the household.
 The household’s amount of accumulated wealth.
 The prices of other products available to the household.
 The household’s tastes and preferences.
 The household’s expectations about future income, wealth, and prices.

Question 12

quantity demanded

Answer 12

The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

Question 13

The most important relationship in individual markets is that between market price and quantity demanded.

Answer 13

Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand.
Thus, we say that an increase in the price of Coca-Cola is likely to cause a decrease in the quantity of Coca-Cola demanded. However, we say that an increase in income is likely to cause an increase in the demand for most goods.

Question 14

demand schedule

Answer 14

Shows how much of a given product a household would be willing to buy at different prices for a given time period.

Question 15

demand curve

Answer 15

A graph illustrating how much of a given product a household would be willing to buy at different prices.

Question 16

law of demand

Answer 16

The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases.
It is reasonable to expect quantity demanded to fall when price rises, ceteris paribus, and to expect quantity demanded to rise when price falls, ceteris paribus. Demand curves have a negative slope.

Question 17

Properties of Demand Curves

Answer 17

1. They have a negative slope.
2. They intersect the quantity (X) axisa result of time limitations and diminishing marginal utility.
3. They intersect the price (Y) axis, a result of limited income and wealth.
   Other Properties of Demand Curves
   The actual shape of an individual household demand curve—whether it is steep or flat, whether it is bowed in or bowed out—depends on the unique tastes and preferences of the household and other factors.

Question 18

income

Answer 18

The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure.

Question 19

wealth or net worth

Answer 19

The total value of what a household owns minus what it owes. It is a stock measure.

Question 20

normal goods

Answer 20

Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

Question 21

inferior goods

Answer 21

Goods for which demand tends to fall when income rises.

Question 22

substitutes

Answer 22

Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases.

Question 23

perfect substitutes

Answer 23

Identical products.

Question 24

complements, complementary goods

Answer 24

Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa.

Question 25

Tastes and Preferences

Answer 25

Income, wealth, and prices of goods available are the three factors that determine the combinations of goods and services that a household is able to buy.
Changes in preferences can and do manifest themselves in market behavior.
Within the constraints of prices and incomes, preference shapes the demand curve, but it is difficult to generalize about tastes and preferences. First, they are volatile. Second, tastes are idiosyncratic.

Question 26

Expectations

Answer 26

What you decide to buy today certainly depends on today’s prices and your current income and wealth.
There are many examples of the ways expectations affect demand.
Increasingly, economic theory has come to recognize the importance of expectations.
It is important to understand that demand depends on more than just current incomes, prices, and tastes.

Question 27

shift of a demand curve

Answer 27

The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions.

Question 28

movement along a demand curve

Answer 28

The change in quantity demanded brought about by a change in price.

Question 29

Change in price of a good or service leads to

Answer 29

change in quantity demanded (movement along a demand curve).

Question 30

Change in income, preferences, or prices of other goods or services leads to

Answer 30

Change in demand (shift of a demand curve).

Question 31

market demand

Answer 31

The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service.

Question 32

Firms build factories, hire workers, and buy raw materials because

Answer 32

they believe they can sell the products they make for more than it costs to produce them.

Question 33

profit

Answer 33

The difference between revenues and costs.

Question 34

quantity supplied

Answer 34

The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period.

Question 35

supply schedule

Answer 35

A table showing how much of a product firms will sell at alternative prices.

Question 36

law of supply

Answer 36

The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied.

Question 37

supply curve

Answer 37

A graph illustrating how much of a product a firm will sell at different prices.

Question 38

The Cost of Production

Answer 38

For a firm to make a profit, its revenue must exceed its costs.
Cost of production depends on a number of factors, including the available technologies and the prices and quantities of the inputs needed by the firm (labor, land, capital, energy, and so on).

Question 39

Assuming that its objective is to maximize profits, a firm’s decision about what quantity of output, or product, to supply depends on:

Answer 39

1. The price of the good or service.
2. The cost of producing the product, which in turn depends on:
   ■ The price of required inputs (labor, capital, and land).
   ■ The technologies that can be used to produce the product.
3. The prices of related products.

Question 40

movement along a supply curve

Answer 40

The change in quantity supplied brought about by a change in price.

Question 41

shift of a supply curve

Answer 41

The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions.

Question 42

Change in price of a good or service leads to

Answer 42

Change in quantity supplied (movement along a supply curve).

Question 43

Change in costs, input prices, technology, or prices of related goods and services leads to

Answer 43

Change in supply (shift of a supply curve).

Question 44

market supply

Answer 44

The sum of all that is supplied each period by all producers of a single product.

Question 45

equilibrium

Answer 45

The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

Question 46

excess demand or shortage

Answer 46

The condition that exists when quantity demanded exceeds quantity supplied at the current price.

Question 47

When quantity demanded exceeds quantity supplied,

Answer 47

price tends to rise.

Question 48

When the price in a market rises,

Answer 48

quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal.

Question 49

excess supply or surplus

Answer 49

The condition that exists when quantity supplied exceeds quantity demanded at the current price.

Question 50

When quantity supplied exceeds quantity demanded at the current price,

Answer 50

the price tends to fall.

Question 51

When price falls,

Answer 51

quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal.

Question 52

difference between demand and supply curves

Answer 52

A demand curve shows how much of a product a household would buy if it could buy all it wanted at the given price.
A supply curve shows how much of a product a firm would supply if it could sell all it wanted at the given price.

Question 53

Quantity demanded and quantity supplied are always

Answer 53

per time period—that
is, per day, per month, or per year.

Question 54

The demand for a good is determined by

Answer 54

by price, household income and wealth, prices of other goods and services, tastes and preferences, and expectations.

Question 55

The supply of a good is determined by

Answer 55

price, costs of production, and prices of related products.

Question 56

Costs of production are determined by

Answer 56

available technologies of production and input prices.

Question 57

difference between movements and shifts

Answer 57

When the price of a good changes, the quantity of that good demanded or supplied changes—that is, a movement occurs along the curve. When any other factor changes, the curve shifts, or changes position.

Question 58

Market equilibrium exists only when

Answer 58

quantity supplied equals quantity demanded at the current price.

Question 59

Demand curves reflect

Answer 59

what people are willing and able to pay for products; demand curves are influenced by incomes, wealth, preferences, prices of other goods, and expectations.

Question 60

Firms in business to make a profit

Answer 60

choose the best available technology—lower costs mean higher profits.

Question 61

When a good is in short supply,

Answer 61

price rises. As it does, those who are willing and able to continue buying do so; others stop buying.