Economics Interactive Review Chp. 4-6

Producers of goods and services...

include manufacturers, farmers, retailers, and service providers

Three factors that can cause a change in demand are..

income, consumer tastes, and compliments.

Wages, materials, and shipping expenses are examples of..

variable costs.

Change in Quantity Demanded

- Change in amount consumers buy because of price change - Each change shown by new point on demand curve - Does not shift the demand curve itself • Individual demand curve - change in quantity demanded shown by movement to right to left along the curve • Market demand curve - shows similar information for entire market

What is the substitution effect?

A change in the amount of a product consumers buy because they buy other similar goods.

Why does a market demand curve show larger quantities than an individual demand curve?

A market demand curve shows the quantities demanded by all consumers, and an individual demand curve shows the quantities demanded by one consumer.

To benefit workers, where does the minimum wage have to be set?

At the equilibrium price for labor.

The price system is neutral because..

Both consumers and producers make decisions that determine the equilibrium price.

What happens when the income of consumers rises?

Consumers usually demand more normal goods.

Chapter 4: Demand

Demand is the willingness to buy a good or service and the ability to pay for it. - The concept of demand is demonstrated every time you buy something. Think of five goods or services that you have purchase. Which of them would you stop buying if the price rose sharply?

Which costs do business owners incur no matter what the level of production output is?

Fixed costs

Why have many cities gotten rid of rent control?

It created housing shortages.

How does the number of producers in a market affect supply and price?

Many competitors can decrease supply by driving some producers out of the market.

Why do black markets often arise when rationing is imposed?

People want products whose supply is limited.

What does the law of supply state?

Producers are willing to sell more of a product at a higher price than at a lower price.

What to factors must be present for a supply of a product to exists?

Producers must be willing and able to provide the product.

Chapter 5: Supply

Supply is the willingness and ability of producers to offer goods and services for sale. - Most people are producers. Doing household chores, working at a job, and providing rides to others are ways of producing goods and services Producers incur costs and receive rewards for the work they do.

Chapter 6: Demand, Supply, and Prices

The equilibrium price is the price at which quantity demanded and quantity supplied are the same - In a market economy, the forces of demand and supply work together to set a price that buyers and sellers find acceptable.

How to rising prices affect producers?

They motivate producers to enter a market.

What determines Elasticity?

Three factors: - availability of substitutes - proportion iof income spent on good or service - whether product is a necessity or luxury

What is the purpose of comparing the marginal cost and marginal revenue of producing a product?

To know the level of production that realized the greatest amount of profit.

Which of the following is an example of demand?

You have saved $150.00 and want to buy new shoes and accessories for the prom.

A change in quantity demanded is..

a change in the amount of a product consumers will buy because of a change in price.

A rise in input costs results in..

a decrease in supply and rise in equilibrium price.

A high price may signal to consumers that..

a product has a high status.

Economists measure elasticity of demand by..

calculating a seller's total revenue.

Consumers expectations about the price of a good or service will often..

determine whether consumers buy products now or later.

The government establishes price floors for many agricultural products to...

encourage farmers to produce an abundant supply of food.

The government often uses..

excise taxes to discourage the consumption of certain products.

When the price of a good or service goes up, your demand will probably...

fall if the cost consumes a large proportion of your income.

A market demand schedule shows..

how much of a good or service all consumers are willing and able to buy at each price.

The quantity of product supplied...

increases as price increases, even though it costs more to produce more.

The price of the resources needed to produce a good or service is called..

input costs

A change in quantity supplied..

is shown as movements along a supply curve.

Sellers use competitive pricing to..

lure customers away from rival producers

A decrease in demand..

makes the demand curve shift to the left.

The availability of substitutes..

makes the demand for a product more elastic.

The change in total output brought about by adding one more worker is called..

marginal product.

When there is a surplus..

prices tend to fall until equilibrium is reached.

What are three factors what produce a change in quantity supplied?

producer expectations, government action, labor productivity

What is a system in which the government allocates goods and services using factors other than price?

rationing

Michael Dell was initially able to undersell his competition by..

selling directly to customers over the telephone.

What market demand did Vera Wang decide to fill when she could not find the product she was looking for?

sophisticated bridal gowns

Having each worker focus on a particular facet of production is called...

specialization

What kind of graph shows how much of a good or service an individual is willing and able to offer for sale at each price?

supply curve

The demand for necessitates...

tends to be inelastic.

When demand increases..

the equilibrium price rises and suppliers sell more.

Demand for product is inelastic when..

the quantity demanded changes little as the price changes.

Equilibrium price is the price at which..

the quantity demanded equals the quantity supplied.

The law of demand states that...

when prices go down, quantity demanded increases; when prices go up, quantity demanded decreases.

Elasticity of Demand

• Buying habits affected by type of product and importance to consumer •Elasticity of demand - measure of how responsive consumers are to price changes - Elastic: quantity demanded changes greatly as price changes - Inelastic: quantity demanded changes little as price changes

Change in Demand

• Change in demand is caused by change in the marketplace - prompts people to buy different amounts at every price - also called shift in demand Six Factors: 1) Change in Income - normal goods demanded *more* when consumers' income rise - inferior goods demanded *less* when consumers' income rise 2) Change in Market Size/ Change in Population 3) Change in consumer tastes 4) Consumer Expectations 5) Substitutes - products used in place of each other 6) Complements - goods that are used together

Changes in Quantity Supplied

• Change in quantity supplied: rise or fall in amount offered for sale because of change in price • Different points on supply curve who change in quantity supplied - Change in quantity supplied DOES NOT shift the supply curve - Market supply curves show larger changes than individual curves

Changes in Supply

• Change in supply-- producers offer different amounts at every price • as production costs rise, supply drops; as costs drop, supply rises 1) Change in Input Costs - price of resources needed to produce good or service 2) Change in Labor Productivity 3) Change in Technology 4) Government Action - excise tax: tax on production or sale of specific good or service - regulation: set of rules/laws designed to control business behavior 5) Producer Expectations 6) Number of Producers

How the Price System works

• Competitive pricing-- sell products at lower prices than others; lures customers away from rival producers, maintains overall profits by selling more units - Neutral: interaction of consumers, producers set equilibrium price - Market driven: market forces, not central planners, determine prices - Flexible: surpluses, shortages lead producers to change prices - Efficient: prices adjust until maximum number of products sold

Law of Demand

• Demand -- the desire for an item and the ability to pay for it • Law of demand - when price of good or service goes up, quantity demand goes down - when price of a good or service goes down, quantity demand goes up • Explains consumer behavior & economic concept

Demand Curves

• Demand curve-- a graph that shows amount of an item a consumer will buy at each price • Market demand curve-- amount all consumers will buy at each price • Demand curves graphically show information found on demand schedules • Visual representation of law of demand; assumes all economic factors except price stay the same

Proportion of Income

• Demand for expensive items tends to be elastic • Demand for inexpensive items tends to be inelastic - Rise in income can lead to greater demand for some goods or services

Demand Schedules

• Demand schedule-- table that summarizes one consumer's behavior; lists how much of an item and individual will buy at each price • Market demand schedule-- a table that summarizes all consumers' behavior; lists how much of an item all consumers will buy at each price

Equilibrium Price in Real Life

• Disequilibrium: imbalance between quantity demanded and quantity supplied • Decrease in demand at every price shifts demand curve to left: equilibrium price falls, fewer units sold even though price is lower. • With increase in demand, demand curve shifts to right: equilibrium price rises, more units sold even at higher prices

Production Costs

• Fixed costs-- expenses owners incur no matter how much they produce • Variable costs-- expenses that vary as level of output changes • Total costs-- the sum of fixed and variable costs • Marginal costs- additional cost of making one more unit of the product

Imposing Price Ceilings

• Government interferes to keep some prices from going too high • Price ceiling: legal Maximum price a seller may charge for a product, set below the equilibrium price, so shortage results

Setting Price Floors

• Government intervenes to increase income to certain producers • Price floor: legal Minimum price buyers may pay for product, set above equilibrium price, so surplus results

Substitute Goods or Services

• If no substitute for a product, demand tends to be inelastic • If there are substitutes for a product, demand tends to be elastic

More about Demand Curves

• Law of diminishing marginal utility; marginal benefit of each additional unit declines as each unit is used • Income effect; amount people buy changes as purchasing power of their income changes • Substitution effect; amount people buy changes as they buy substitute products

Labor Affects Production

• Marginal product-- change in total output caused by adding one worker • specialization-- having a worker focus on one aspect of production - Marginal product schedule: relation between labor, marginal product - Increasing returns: new workers cause marginal product increase - Diminishing returns: total output grows at decreasing rate - Negative returns: output decreases through crowding, disorganization

Earning the Highest Profit

• Marginal revenue-- money made rom sale of each additional unit sold; same price • Total revenue-- income from selling a product - To make most profit, owner decides number workers hired, units made

Interaction of Demand and Supply

• Market equilibrium: at a certain price, quantity demanded and quantity supplied are equal • Equilibrium price: price at which quantity demanded and quantity supplied are equal - Law of demand and supply interact in the market

Market Supply Curve

• Market supply curve differs in scope from individual supply curve: both constructed same way • Supply curves for all types of producers follow law of supply: reason is that higher prices single potential for higher profits

Necessity or Luxury

• Necessity - something needed for life; demand for necessities is inelastic • Luxury - something desired but not essential; demand for luxuries tends to be elastic

Prices Motivate Producers and Consumers

• Prices motivate consumers and producers in different ways • Incentive encourages people to take certain action • In price system, incentives move producers and consumers: both act in ways consistent with own best interests • Prices signal whether it is good time to enter or leave a market

Supply Schedules

• Supply schedule shows: amount of product individual willing , able to offer at each price • Market supply schedule shows: amount of product producers willing, able to offer at each price

Law of Supply

• Supply--willingness and ability of producers to offer goods, services • Anyone who provides goods or services is a producer • Law of supply: producers willing to sell more of a product at a higher price than at lower price

Reaching the Equilibrium Price

• Trail and error may be necessary for market to arrive at equilibrium - Market may have surplus: more quantity supplied than demanded, prices tend to fall and producers cut back production - Market may have shortage: more quantity demanded than supplied, prices rise and producers increase quantity supplied

Individual Supply Curve

• graphic representation of law of supply • supply schedule and curve based on following assumption: all economic factors except price remain the same

Supply Curves

• shows data from supply schedule in graph form • market supply curve shows data from market supply schedule