Vocabulary: Unit Three

Question 1

Income effect

Answer 1

The same amount of money can buy less of a good when the price increases, so consumers buy less

Question 2

Substitution effect

Answer 2

The relative price of an alternative good decreases when the price of a good increases, so consumers buy less of the initial good and more of the alternative good

Question 3

Determinants of demand

Answer 3

Things that help determine how much of a good or service consumers are willing and able to buy at different price

Question 4

Supply

Answer 4

The quantity of a good or service that a firm is willing and able to sell at different prices; the relationship between price and quantity supplied

Question 5

Determinants of supply

Answer 5

Things that help determine how much of a good or service suppliers are willing and able to supple at different prices

Question 6

Equilibrium price

Answer 6

The price where quantity demanded equals quantity supplied

Question 7

Equilibrium price

Answer 7

The corresponding quantity

Question 8

Price ceiling

Answer 8

A maximum legal price for a good or service; results in a shortage

Question 9

Price floor

Answer 9

A minimum legal price for a good or service; results in a surplus

Question 10

Price elasticity of demand

Answer 10

Measures how much he quantity demanded changes when the price changes; the sensitivity of consumers to price changes

Question 11

Price elasticity of supply

Answer 11

Compares the change in quantity supplied to a change in price; responsiveness of suppliers to a price

Question 12

Income elasticity of demand

Answer 12

Measures how the demand for a good changes as a result of a change in income

Question 13

Normal goods

Answer 13

Goods whose demand increases as income increases

Question 14

Inferior goods

Answer 14

Goods whose demand decreases as income increases

Question 15

Cross-price elasticity of demand

Answer 15

Measures the responsiveness of demander so to a change in the price of another good

Question 16

Substitute good

Answer 16

A good with positive cross-price elasticity; an alternative good

Question 17

Complement good

Answer 17

A good with negative cross-price elasticity used in correspondence with another good

Question 18

Utility

Answer 18

The satisfaction or service a person obtains from consuming a good or service

Question 19

Marginal utility

Answer 19

The increase in utility a person gains from consuming an additional unit of a good

Question 20

Total utility

Answer 20

The total satisfaction a person receives from consuming a good

Question 21

Diminishing marginal returns

Answer 21

As a good is consumed, each additional unit of the good consumed generates less utility

Question 22

Consumer surplus

Answer 22

The difference between what consumers actually pay for a good and the maximum amount they would’ve been willing to pay; the difference between the total value consumers place on a good and what they pay for a good; the additional amount consumers would be willing and able to pay for a good