Econ Chapter 2

What are the three questions that must be answered in an economic system?

1.) What to produce? 2.) How to produce it? 3.) Who gets what share of the pie?

What are the two reasons the demand curve slopes downward?

1.)As the good or service becomes more expensive, compared to other goods and services, people switch to substitutes. 2.) As the good becomes more expensive, people can't afford to buy as much of it- or some people can't afford any of it

The supply curve illustrates that firms:

increase the quantity supplied of a good when its price rises.

The buyer's reservation price for a particular good or service is the:

largest price the buyer would be willing to pay for it.

An outcome is socially optimal if it:

maximizes total economic surplus.

The height of the demand curve at any point

the price that the corresponding marginal buyer is willing to pay = the reservation price

A seller's reservation price is generally equal to:

the seller's marginal cost.

The Demand Curve

the set of all price-quantity pairs for which buyers are "satisfied" • Satisfied means being able to buy the amount they want to , given its price

Supply Curve

A graph or schedule showing the quantity of a good that sellers with to sell at each right.

Three archetypical economic systems

Subsistence command economy Market systems

the market

The entire group of buyers and sellers of a particular good or service makes up:

Buyers reservation price

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

A movement along a demand curve from one price-quantity combination to another is called:

a change in quantity demanded.

"As the price of personal computers continues to fall, demand increases." This headline is inaccurate because:

a falling price for personal computers increases quantity demanded, not demand.

To understand how the price of a good is determined in a free market, one must account for the interests of

buyers and sellers

One reason the demand curve slopes ______ is that as prices fall ______.

downward; more people find that the price is now less than their reservation price.

According to the equilibrium principle

market equilibrium exploits all opportunities for individual gain, but may not exploit gains possible through collective action.

"All else constant, consumers will purchase more of a good as the price falls." This statement reflects the behavior underlying:

the demand curve.

Efficiency occurs when

the socially optimal quantity of goods and services is being produced.

As coffee becomes more expensive, Joe starts drinking tea instead of coffee. This is called:

the substitution effect of a price change.

Supply curves are generally _______ sloping because ___________.

upward; of the principle of increasing opportunity costs