Ch 3

lower

A DECREASE IN DEMAND will lead to: _______ equilibrium price _______ equilibrium quantity

c

An DECREASE IN SUPPLY will lead to: a) Lower equilibrium price, Lower equilibrium quantity b) Lower equilibrium price, Higher equilibrium quantity c) Higher equilibrium price, Lower equilibrium quantity d) Higher equilibrium price, Higher equilibrium quantity

higher

An INCREASE IN DEMAND will lead to: _______ equilibrium price _______ equilibrium quantity

b

An INCREASE IN SUPPLY will lead to: a) Lower equilibrium price, Lower equilibrium quantity b) Lower equilibrium price, Higher equilibrium quantity c) Higher equilibrium price, Lower equilibrium quantity d) Higher equilibrium price, Higher equilibrium quantity

buyer's surplus

Buyer's reservation price minus the market price

The Efficiency Principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

decrease Automobile insurance and automobiles are complements, so an increase in automobile insurance rates will thus shift the demand curve for automobiles to the left. Some people who would have bought new automobiles with the lower insurance rates will choose instead to use public transportation or other means of transportation.

How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and quantity in the market for new automobiles.

Right The supply curve would shift to the right. The discovery is a technological improvement, so the improved technique would allow a farmer to use the same inputs to produce more corn.

How would the following affect the US market supply curve for corn? A new and improved crop rotation technique is discovered. The supply curve would shift to the ____.

Left The supply curve would shift to the left. A tornado would destroy corn fields, along with infrastructure used to harvest and store it. Thus, at every given price the quantity of corn supplied would be lower and the supply curve shifts to the left.

How would the following affect the US market supply curve for corn? A tornado sweeps through Iowa. The supply curve would shift to the ____.

Right The supply curve would shift to the right. New tax breaks make farming relatively more profitable than before, so those who were earning an income from a non-farming job that paid just a little bit more than farming would switch to farming if the tax break is big enough.

How would the following affect the US market supply curve for corn? The government offers new tax breaks for farmers. The supply curve would shift to the ____.

Right The supply curve would shift to the right. Fertilizer is an input into the production of corn so this is an example of a decrease in an input price. A decrease in input prices shifts the supply curve to the right.

How would the following affect the US market supply curve for corn? The price of fertilizer falls. The supply curve would shift to the ____.

d

If SUPPLY DECREASES and DEMAND DECREASES a) P Depends, Q Increases b) P Increases, Q Depends c) P Decreases, Q Depends d) P Depends, Q Decreases

b

If SUPPLY DECREASES and DEMAND INCREASES a) P Depends, Q Increases b) P Increases, Q Depends c) P Decreases, Q Depends d) P Depends, Q Decreases

c

If SUPPLY INCREASES and DEMAND DECREASES a) P Depends, Q Increases b) P Increases, Q Depends c) P Decreases, Q Depends d) P Depends, Q Decreases

a

If SUPPLY INCREASES and DEMAND INCREASES a) P Depends, Q Increases b) P Increases, Q Depends c) P Decreases, Q Depends d) P Depends, Q Decreases

Unchanged An increase in the price of CDs decreases the quantity demanded of CDs, which causes movement along the demand curve.

Indicate how you think each of the following would shift demand in the indicated market. Buyers in the market for CDs learn of an increase in the price of CDs. The demand curve would shift to the _____.

Right Since these goods are substitutes, an increase in the price of MP3s would result in an increased demand for CDs.

Indicate how you think each of the following would shift demand in the indicated market. Buyers in the market for CDs learn of an increase in the price of downloadable MP2s ( a substitute for CDs). The demand curve would shift to the _____.

Left Buyer preference will probably change because most people want to avoid foods that cause heart disease, so buyers will purchase fewer pizzas with pepperoni.

Indicate how you think each of the following would shift demand in the indicated market. Buyers in the market for pizza read a study linking pepperoni consumption to heart disease. The demand curve would shift to the _____.

Right Buyer income has risen and vacations are a normal good, so this increases the quantity demanded at every given price.

Indicate how you think each of the following would shift demand in the indicated market. The incomes of buyers in the market for Adirondack vacations increases. The demand curve would shift to the _____.

Causes of Supply Shifts

Input prices Production technology Number of sellers in the market Expectations about future prices

seller's surplus

Market price minus the seller's reservation price

Right As a result, both the equilibrium price and the equilibrium quantity of oranges will increase.

Predict what will happen to the equilibrium price and quantity of oranges if the following events take place. A study finds that a daily glass of orange juice reduces the risk of heart disease. The demand curve would shift to the _____.

Right A better than expected harvest means that supply will be greater. As result, the equilibrium price of oranges will decrease and the equilibrium quantity of oranges will increase.

Predict what will happen to the equilibrium price and quantity of oranges if the following events take place. Exceptionally good weather provides a much greater than expected harvest. The supply curve would shift to the _____.

Left Since grapefruit can be assumed to be a substitute for oranges for most consumers, a drastic decrease in the price of grapefruit will make some of the current orange consumers buy grapefruit instead. As a result, both the equilibrium price and equilibrium quantity of oranges will decrease.

Predict what will happen to the equilibrium price and quantity of oranges if the following events take place. The price of grapefruits falls drastically. The demand curve would shift to the _____.

Left Since labor is an input to orange production, an increase in the wage is an increase in the cost of an input. As a result, the equilibrium price of oranges will increase and the equilibrium quantity will decrease. Note that an increase in wages does not automatically mean an increase in the productivity of the workers, which would have affected supply in the opposite direction.

Predict what will happen to the equilibrium price and quantity of oranges if the following events take place. The wage paid to orange pickers rises. The supply curve would shift to the _____.

excess demand

The difference between quantity supplied and quantity demanded. A shortage

excess supply

The difference between quantity supplied and quantity demanded. A surplus

equilibrium

a balanced or unchanging situation in which all forces at work within a system are cancelled by others

efficiency

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

inferior good

a good whose demand curve shifts leftward when the incomes of buyers increase (or vice versa)

normal good

a good whose demand curve shifts rightward when the incomes of buyers increase (or vice versa)

supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price

The Equilibrium Principle

a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

demand curve

a schedule or graph showing the quantity of a good that buyers wish to buy at each price

cash on the table

an economic metaphor for unexploited gains from exchange

invisible hand

describes the forces moving price and quantity toward equilibrium

market equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

income effect

the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power

substitution effect

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

total surplus

the difference between the buyer's reservation price and the seller's reservation price

buyer's reservation price

the largest dollar amount the buyer would be willing to pay for a good

equilibrium price

the price at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

equilibrium quantity

the quantity at which the amount producers are willing to supply is equal to the amount consumers are willing to buy

socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost

complements

two goods for which an increase in the price of one causes a leftward shift in the demand curve for the other (or vice versa)

substitutes

two goods for which an increase in the price of one causes a rightward shift in the demand curve for the other (or vice versa)