Exam 1 - chapter 3

Total surplus ____

(the sum of consumers' surplus and producers' surplus) is maximized at equilibrium.

The law of supply does not hold when there is ____

no time to produce more units of a good during a given period or when goods cannot be produced at all over that period.

Use the law of diminishing marginal utility to explain why demand curves slope downward.

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What does it mean to say that "the market" feeds Cleveland, Austin, Atlanta, or Indianapolis?

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What is the difference between a movement factor and a shift factor?

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The only factor that can directly cause a change in the quan-tity demanded of a good is ____

a change in the good's own price.

The only factor that can directly cause a change in the quan-tity supplied of a good is ____

a change in the good's own price.

Factors that can change demand and ____

cause the demand curve to shift are income, preferences, the prices of related goods (substitutes and complements), the number of buyers, and expectations of future price.

Factors that can change supply and ____

cause the supply curve to shift are the prices of relevant resources, technology, the prices of other goods, expectations of future price, taxes and subsidies, and government restrictions.

Mutually beneficial trade between buyers and sellers ____

drives the market to equilibrium.

Demand and supply together establish the ____

equilibrium price and equilibrium quantity.

A surplus exists in a market if, at some price, the quantity supplied is ____

greater than the quantity demanded. A shortage exists if, at some price, the quantity demanded is greater than the quantity supplied.

Disequilibrium Price

A price other than the equilibrium price. A price at which the quantity demanded does not equal the quantity supplied.

Disequilibrium

A state of either surplus or shortage in a market.

Producers' (or sellers') surplus is the difference between the price the seller receives and the minimum selling price: ____

Producers'surplus52 Price received Minimum selling price

In the previous chapter, you learned about the law of increas-ing opportunity costs. What does this law have to do with an upward-sloping supply curve?

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Explain how the market moves to equilibrium in terms of shortages and surpluses and in terms of maximum buying prices and minimum selling prices.

The market moves to equilibrium because if a product costs to much then the quantity demanded is low so the price will begin to decrease and vice versa with increasing prices.

Demand Schedule

The numerical tabula-tion of the quantity demanded of a good at different prices. A demand schedule is the numerical representation of the law of demand.

Supply Schedule

The numerical tabulation of the quantity supplied of a good at different prices. A supply schedule is the numerical rep-resentation of the law of supply.

Equilibrium Price (Market-Clearing Price)

The price at which the quantity demanded of a good equals the quantity supplied.

Own Price

The price of a good. For example, if the price of oranges is $1, this is its own price.

The price of good X is higher in year 2 than in year 1 and people are buying more of good X in year 2 than year 1. Obviously, the law of demand does not hold. Do you agree or disagree? Explain your answer.

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Suppose the demand curve for a good is downward slop-ing and the supply curve is upward sloping. Now suppose demand rises. Will producers' surplus rise or fall? Explain your answers.

The producer's surplus will rise because the product is now being sold at a higher price.

Subsidy

A monetary payment by govern-ment to a producer of a good or service.

Some goods are bought largely because they have "snob appeal." For example, the residents of Beverly Hills gain prestige by buying expensive items. In fact, they won't buy some items unless they are expensive. The law of demand, which holds that people buy more at lower prices than higher prices, obviously doesn't hold for the residents of Beverly Hills. The following rules apply in Beverly Hills: high prices, buy; low prices, don't buy. Discuss.

*taste factor. Because they can obviously afford more- as their income rises so does their demand. So, if they have a bigger income they are going to demand nicer, better quality items simply because they can. It's a normal good.

What is wrong with this statement: As the price of a good falls, the supply of that good falls, ceteris paribus.

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Shortage (Excess Demand)

A condition in which the quantity demanded is greater than the quantity supplied. Shortages occur only at prices below the equilibrium price.

Surplus (Excess Supply)

A condition in which the quantity supplied is greater than the quantity demanded. Surpluses occur only at prices above the equilibrium price.

Neutral Good

A good for which demand does not change as income rises or falls.

Inferior Good

A good for which demand falls (rises) as income rises (falls).

Normal Good

A good for which demand rises (falls) as income rises (falls).

Describe how each of the following will affect the demand for personal computers: a. A rise in income (assuming that computers are a normal good) b. A lower expected price for computers c. Cheaper software d. Computers that are simpler to operate

A. A raise in income would increase the demand for computers. B. A lower expected price for customers would increase the demand. C. Cheaper software would do nothing because it has no immediate affect on the computer or customer. D. Computers that are simpler to operate would do nothing because it has no immediate affect on the customer.

Describe how each of the following will affect the supply of personal computers: a. A rise in wage rates b. An increase in the number of sellers of computers c. A tax placed on the production of computers d. A subsidy for the production of computers

A. A rise in wage rates would decrease the supply of computers B. An increase in the number of sellers of computers would decrease the supply of computers. C. A tax placed on the production of computers would decrease the supply D. A subsidy would increase the supply of computers.

With respect to each of the following changes, identify whether the demand curve will shift rightward or leftward: a. An increase in income (the good under consideration is a normal good) b. A rise in the price of a substitute good (caused by a decline in supply) c. A rise in expected future price d. A fall in the number of buyers

A. The demand curve will shift to the right. B. The demand curve will shift to the right. C. The demand curve will shift to the left. D. The demand curve will shift to the left.

Identify what happens to equilibrium price and quantity in each of the following cases: a. Demand rises and supply is constant. b. Demand falls and supply is constant. c. Supply rises and demand is constant. d. Supply falls and demand is constant. e. Demand rises by the same amount that supply falls. f. Demand falls by the same amount that supply rises. g. Demand falls less than supply rises. h. Demand rises more than supply rises. i. Demand rises less than supply rises. j. Demand falls more than supply falls. k. Demand falls less than supply falls.

A. The price of the item would increase B. The price of the item would decrease C. The price of the item would decrease D. The price of the item would increase E. The price would increase greatly F. The price would decrease greatly G The price would increase H. The price would increase I. The price would decrease J. The price would decrease K. The price would increase

Market

Any place people come together to trade.

Law of Demand

As the price of a good rises, the quantity demanded of the good falls, and as the price of a good falls, the quantity demanded of the good rises, ceteris paribus.

Law of Supply

As the price of a good rises, the quantity supplied of the good rises, and as the price of a good falls, the quantity sup-plied of the good falls, ceteris paribus.

Compare the ratings for television shows with prices for goods. How are ratings like prices? How are ratings different from prices? (Hint: How does rising demand for a particular television show manifest itself?)

As the ratings for a show go up the TV supplier will supply more access to this show just like the law of supply. However the ratings are not directly proportional to the shows appearance.

Consumers' surplus is the difference between the maximum buying price and the price paid by the buyer: ____

Consumers' surplus Maximum buying price Price paid

What is wrong with the following statement? Demand refers to the willingness of buyers to purchase different quantities of a good at different prices during a specific period.

Demand refers to both the willingness and ability of buyers, not just their willingness. (The quantity demanded refers to the willingness of buyers to purchase different quantities of a good at different prices.)

What is the difference between demand and quantity demanded?

Demand refers to the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period, whereas quantity demanded refers to a specific number of units buyers want to buy at a specific price during a specific time period. (Demand is the whole line and is affected by the market while the quantity demanded is a specific point on the line and is affected by the price.)

Equilibrium

Equilibrium means "at rest." Equilibrium in a market is the price-quantity combination from which buyers or sellers do not tend to move away. Graphically, equilib-rium is the intersection point of the supply and demand curves.

True or false? As the price of oranges rises, the demand for oranges falls, ceteris paribus. Explain your answer.

False. It should be "quantity demanded" instead of "demand." (False, the quantity demanded by the consumer decreases.)

At equilibrium in a market, the maximum price that buy-ers would be willing to pay for the good is equal to the minimum price that sellers need to receive before they are willing to sell the good. Do you agree or disagree with this statement? Explain your answer.

I disagree. Equilibrium is the point where the producer is happy with the price and supply of the product and the consumer is happy about the price and accessibility to the product.

Law of Diminishing Marginal Utility

Over a given period, the marginal (or addi-tional) utility or satisfaction gained by con-suming equal successive units of a good will decline as the amount consumed increases.

What is the difference between supply and quantity supplied?

Supply is the line and is affected by the market while quantity supplied is a point on the line and affected by the price of the product.

A Dell computer is a substitute for an HP® computer. What happens to the demand for HP computers and the quantity demanded of Dell computers as the price of a Dell falls (as a result of a change in supply)?

The demand and quantity of the HP computers decreases.

"The price of a bushel of wheat, which was $3.00 last month, is $3.70 today. The demand curve for wheat must have shifted rightward between last month and today." Discuss.

The demand curve must have shifted to the right because for the same quantity the price will be higher.

Consumers' Surplus (CS )

The difference between the maximum price a buyer is will-ing and able to pay for a good or service and the price actually paid. (CS 5 Maximum buying price - Price paid)

Producers' (Sellers') Surplus (PS )

The difference between the price sellers receive for a good and the minimum or lowest price for which they would have sold the good. (PS 5 Price received - Minimum selling price).

Demand Curve

The graphical representa-tion of the law of demand.

Upward-Sloping Supply Curve

The graphical representation of the law of supply.

Equilibrium Quantity

The quantity that corresponds to the equilibrium price. The quantity at which the amount of the good that buyers are willing and able to buy equals the amount that sellers are willing and able to sell, and both equal the amount actually bought and sold.

What does a sale on shirts have to do with the law of demand (as applied to shirts)?

The sale will decrease the price which in turn will increase the quantity demanded for that product.

Spontaneous Order

The spontaneous and unintended emergence of order out of the self-interested actions of individuals; an unin-tended consequence of human action, with emphasis placed on the word "unintended."

Total Surplus (TS )

The sum of consumers' surplus and producers' surplus. (TS 5 CS 1 PS.)

How might the price of corn affect the supply of wheat?

The two products could be each others opportunity cost so the increase in corn would decrease wheat and vice versa.

Demand

The willingness and ability of buyers to purchase different quantities of a good at different prices during a specific period.

Supply

The willingness and ability of sellers to produce and offer to sell different quanti-ties of a good at different prices during a specific period.

Many movie theaters charge a lower admission price for the first show on weekday afternoons than they do for a week-night or weekend show. Explain why.

They do this because they have to same opportunity cost whether 100 people show up or 10 so they want to fill the theater and the lower prices work as an incentive.

On most days, more people want to see the taping of The Tonight Show Starring Jimmy Fallon (in New York City) than there are seats in the taping studio. What might explain this shortage?

This shortage is due to the limited space of the set. It is also park of the producer's surplus because people are willing to pay more to get the seats.

Complements

Two goods that are used jointly in consumption.

Substitutes

Two goods that satisfy similar needs or desires.

When speeding tickets were $100, usually 500 speeders were on the roads each month in a given city; when ticket prices were raised to $250, usually 215 speeders were on the roads in the city each month. Can you find any economics in this observation?

When the tickets were not very expensive people didn't mind getting them but when the price increased people became more stingy with their money and drove safer.

Must consumers' surplus equal producers' surplus at the equilibrium price? Explain your answer.

Yes, because if their is a surplus in both producers and consumers than they equal each other out and there is no surplus.

"The price of T-shirts keeps rising and rising, and people keep buying more and more. T-shirts must have an upward-sloping demand curve." Identify the error.

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The more consumers' surplus that buyers receive, ____

the better off they are. The more producers' surplus that sellers receive, the better off they are. Total surplus is the sum of consumers' surplus and producers' surplus.

A (downward-sloping) demand curve is ____

the graphical repre-sentation of the law of demand.

An upward-sloping supply curve is ____

the graphical representa-tion of the law of supply. More generally, a supply curve (no matter how it slopes) represents the relationship between the price and quantity supplied.

The law of demand states that as the price of a good rises, ____

the quantity demanded of it falls, and that as the price of a good falls, the quantity demanded of it rises, ceteris paribus. The law of demand holds that price and quantity demanded are inversely related.

The law of supply states that as the price of a good rises, ____

the quantity supplied of the good rises, and that as the price of a good falls, the quantity supplied of the good falls, ceteris pari-bus. The law of supply asserts that price and quantity supplied are directly related.

Quantity demanded is ____

the total number of units of a good that buyers are willing and able to buy at a particular price.