Micro Chapter 3

Supply and Demand Key points

(1) Excess supply and excess demand are NOT unique points (2) Equilibrium is a unique point

The price for one good can be intimately tied to demand for another good. These are called?

(1) Substitute goods (2) Complement goods

Demand is the relationship between two variables: price and quantity demanded. What are two changes?

(1) When price changes, quantity demanded changed but demand does NOT change - This is movement along a demand curve (2) When something else changes, demand changes (i.e. the relationship changes) -This is movement of the entire curve

What if the actual price is higher than your minimum price?

- In economics, we call this difference producer surplus (PS) - Graphically, PS is the area above supply, out to quantity, and up to price

Another way to think about the difference between demand and quantity demanded

-Why is the consumer buying more (or less)? -If price is the reason, then quantity demanded changes; move along the demand curve -If any variable besides price is the reason, then demand changes, shift the demand curve

Which of the following best explains the source of consumer surplus for good A?

A. Many consumers pay prices that are greater than the market price of good A. B. Many consumers would be willing to pay more than the market price for good A. C. Many consumers think the market price of good A is greater than its cost. D. Many consumers think the demand for good A is elastic. Ans: B

If the demand for a good decreased, what would be the effect on the equilibrium price and quantity?

A. Price would increase and quantity would decrease. B. Price would decrease and quantity would decrease. C. Price would increase and quantity would increase. D. Price would decrease and quantity would increase. Ans: B

How will an increase in lumber prices influence the home construction market?

A. The demand for newly constructed homes will increase. B. The demand for newly constructed homes will decrease. C. The supply of newly constructed homes will increase. D. The supply of newly constructed homes will decrease. Ans: D

If air travel and bus travel are substitutes

A. an increase in the price of bus travel will decrease the demand for air travel. B. a decrease in the price of bus travel will decrease the demand for air travel. C. an increase in the price of bus travel will generally have no effect on the demand for air travel. D. an increase in the price of bus travel will shift the demand curve for air travel to the left. Ans: B

When economists say the quantity demanded of a product has decreased, they mean the?

A. demand curve has shifted to the left. B. demand curve has shifted to the right. C. price of the product has fallen, and consequently, consumers are buying more of it. D. price of the product has risen, and consequently, consumers are buying less of it. Ans: D

When economists say the demand for a product has increased, they mean the?

A. demand curve has shifted to the right. B. price of the product has fallen, and consequently, consumers are buying more of it. C. cost of producing the product has risen. D. amount of the product that consumers are willing to purchase at various prices has decreased. Ans: A (Price is staying the same and something else is changing)

When economists say the supply of a product has increased, they mean the

A. price of the product has risen, and consequently, suppliers are producing more of it. B. supply curve has shifted to the left. C. amount of the product that consumers are willing to purchase at various prices has increased. D. supply curve has shifted to the right. Ans: D

If Georgia experiences a late frost that damages the peach crop, we should expect the

A. supply curve for peaches to shift to the right and the price of peaches to fall. B. supply curve for peaches to shift to the left and the price of peaches to rise. C. demand curve for peaches to shift to the left and the price of peaches to fall. D. demand curve for peaches to shift to the right and the price of peaches to rise. Ans: B

When economists say the quantity supplied of a product has decreased, they mean the

A. supply curve has shifted to the left. B. supply curve has shifted to the right. C. price of the product has risen, and consequently, suppliers are producing more of it. D. price of the product has fallen, and consequently, suppliers are producing less of it. Ans: D

If coffee and cream are complements, an increase in the price of coffee will cause

A. the demand for cream to increase. B. the demand for cream to fall. C. the demand for coffee to fall. D. no change in the demand for cream; only quantity demanded would be affected. Ans: B

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Why is the supply curve upward sloping?

At a higher price, a product is usually more profitable so a firm has a stronger incentive to make more.

Price is not the only factor that determines how much a firm makes. What are some changes that affect price?

Changes: (1) When price changes, quantity supplied changes but supply does NOT change -This is movement along a supply curve (2) When something else changes, supply (i.e. the relationship changes) -This is movement of the entire curve

Example of substitute goods

Example: (A) Iphone, (B) Android If the price of (A) i rose, the quantity demanded of (A) i would fall and consumers would purchase less (A) i. The demand for (B) A would rise, causing the demand curve to shift to the right.

Example of complement goods

Example: (A) PB, (B) Jelly. If the price of (A) PB rose, the quantity demanded of (A) PB would fall and consumers would purchase less (A) PB. The demand for (B) Jelly would fall, causing the demand curve to shift left.

Typical "something else" changes:

Income Number of consumers Prices of related goods (substitutes and complements) Expectations Demographics Tastes and preferences

What is quantity demanded?

It is a number; it's how many units of a good you bought.

The supply and demand analysis and the 3 step procedure

Model of how buyers and sellers operate in the marketplace. You don't have to use graphs but it's helpful. Only allow one variable to change at a times Use this 3 step procedure: (1) Identify the change (2) Determine if Supply or Demand is affected and how (3) Draw and read graph (or reason through it)

Changes

Resource prices Technology Nature Political Taxes

Consumers buy less of a good as its price increases because

Substitute goods are now relatively cheaper. The income of consumers has effectively decreased.

Define Consumer surplus

The amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it. Willingness to pay-price= consumer surplus

Producer surplus

The amount a seller is paid for a good minus the seller's cost of providing it. Ex: Willing to stay for $200 but is given $300. PS is $100

The law of demand

The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls, when price falls, quantity demanded rises.

Diminishing marginal utility

The marginal benefit you receive from an item falls as you gain more of the item. The only way to get you to buy more is to lower the price

The Law of Supply

The positive relationship between price and quantity supplied; when the price rises, quantity supplied rises; when price falls, quantity supplied falls. Quantity supplied is a number; it's how many units of a good you made

What are substitute goods?

They're used in place of each other. An increase in price for the first good will increase demand for the second good A decrease in price for the first good will decrease demand for the second good

Complement goods

Usually consumed at the same time. An increase in price for the first good will decrease demand for the second good. A decrease in price for the first good will increase demand for the second good.

The substitution effect

When consumers react to an increase in a good's price by consuming less of that good (decrease in quantity demanded) and more of other goods

How do consumers react to price changes?

When the price of one good falls, people substitute away from relatively more expensive goods to the relatively cheaper goods

What is the income effect?

When the price of one good falls, real consumer income rises so people buy more (it's like getting a raise). Both cause the demand curve to be downward sloping

Another way to think about the difference between supply and quantity supplied

Why is the firm producing more (or less)? If price is the reason, then quantity supplied changes; move along the supply curve.

Sebastian drinks Mountain Dew. He can buy as many cans of Mountain Dew as he wishes at a price of $0.50 per can. On a particular day, he is willing to pay $0.95 for the first can, $0.80 for the second can, $0.60 for the third can, and $0.40 for the fourth can. Assume Sebastian is rational in deciding how many cans to buy. His consumer surplus is

a. $0.50. b. $0.85. c. $1.05. d. $1.20. Ans: B

Isabella buys a new camera for $80. She receives consumer surplus of $35 on her purchase if her willingness to pay is?

a. $35. b. $45. c. $80. d. $115. Ans: D

Andre decides that he would pay as much as $3,000 for a new laptop computer. He buys the computer and realizes consumer surplus of $700. How much did Andre pay for his computer?

a. $700 b. $2,300 c. $3,000 d. $3,700 Ans: B

If price rises, what happens to the quantity demanded for a product?

a. It increases. b. It decreases. c. It does not change. d. Uncertain--economic theory has no answer to this question. Ans: B

How will a reduction in the price of cotton influence the market for blue jeans?

a. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the left. b. The cost of producing blue jeans will fall, and the supply curve for blue jeans will shift to the right. c. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the left. d. The cost of producing blue jeans will rise, and the supply curve for blue jeans will shift to the right. Ans: B

Other things being equal, the effect of a decrease in the price of grapes would be illustrated by

a. a rightward shift in the demand curve for grapes. b. an increase in the quantity demanded for grapes. c. a leftward shift in the demand curve for grapes. d. a decrease in the quantity demanded grapes. Ans: B

Other things constant, which of the following would most likely cause the supply of garden hoses to decrease?

a. an increase in the price of plastic used to make garden hoses b. a technological advance that lowers the cost of producing garden hoses c. the occurrence of a very dry year with little rain d. a decrease in the price of grass seed Ans: A

Which of the following will cause a decrease in the demand for peanut butter?

a. an increase in the supply of peanut butter b. an increase in the price of peanut butter c. a doubling of the price of bread d. a drought in Georgia that destroyed 30 percent of the peanut crop e. an increase in consumer income Ans: C

The price of chicken increases as the result of higher beef prices. This indicates that

a. chicken and beef are substitutes. b. chicken and beef are complements. c. the market demand for beef is inelastic. d. the market demand for chicken is elastic. Ans: A

To be economically successful, the entrepreneur must?

a. combine resources in a manner that increases their value. b. produce a good that consumers value less than the resources used to produce it. c. use only personal financial capital to avoid the interest payments that would have to be paid if the money is borrowed from the bank. d. transform or rearrange resources to maximize the entrepreneur's cost of production. Ans: A

In Atlanta, tickets for professional and college football games are substitutes. An increase in the ticket price for professional football, other things being equal, will

a. increase the demand for college football tickets. b. decrease the demand for college football tickets. c. not change the demand for college football tickets. d. decrease the demand for professional football games. Ans: A

If consumer purchases of a good are highly sensitive to the price of the good, economists say the demand for the good is relatively?

a. inelastic. b. elastic. c. robust. d. inverse. Ans: B

The law of demand refers to the?

a. inverse relationship between the price of a good and the willingness of consumers to buy it. b. price increase that results from an increase in demand for a good of limited supply. c. inverse relationship between the price of a good and the quantity offered for sale. d. increase in the quantity of a good available when its price increases. Ans: A

Consumer surplus is?

a. is the difference between total willingness to pay and the total amount actually paid. b. guarantees that the market value of a good in money is equal to the total economic value of the good. c. is always negative because of diminishing marginal utility. d. is the total area under a consumer's demand curve. Ans: A

If consumer tastes are changing more in favor of the consumption of a particular good the

a. market demand curve will shift to the left. b. consumer will move up a given demand curve, decreasing the quantity demanded. c. consumer would move down a given demand curve, decreasing the quantity demanded. d. consumer would move down a given demand curve, increasing the quantity demanded. e. market demand curve would shift to the right. Ans: E

If the demand for a good is relatively elastic, this means that consumer purchases of the good are?

a. not very sensitive to the price of the good. b. highly sensitive to the price of the good. c. unrelated to the price of the good. d. unaffected by changes in the income level of consumers. Ans: B

If the demand for a good is relatively inelastic, this means that consumer purchases of the good are?

a. not very sensitive to the price of the good. b. highly sensitive to the price of the good. c. unrelated to the price of the good. d. unaffected by changes in the income level of consumers. Ans: A

A demand curve for flowers would show the?

a. number of flowers the floral shop is willing to sell at various prices. b. number of people who need flowers. c. quantity of people who want to buy these flowers. d. number of flowers that will be purchased at various prices. Ans: D

Ceteris paribus, an increase in the price of a good will cause the

a. quantity demanded of the good to increase. b. quantity supplied of the good to decrease. c. producer surplus derived from the good to increase. d. supply of the good to decrease. Ans: C

The price elasticity of demand for a good or service is determined primarily by the?

a. size of the consumer surplus. b. availability of substitutes for the good. c. incomes of consumers. d. availability of complementary goods. Ans: B

In a competitive market economy, a resource in short supply will be allocated

a. so that each firm gets enough to keep producing some portion of its output. b. according to how much each firm purchased before the shortage. c. to those firms that can make the most profitable use of it. d. by government regulation. Ans: C

When economists say the supply of a product has increased, they mean the

a. supply curve has shifted to the right. b. price of the product has risen, and consequently, suppliers are producing more of it. c. supply curve has shifted to the left. d. amount of the product that consumers are willing to purchase at various prices has increased. Ans: A

The price of a good will tend to fall when

a. there is excess demand for the good. b. there is excess supply of the good. c. demand for the good increases. d. the supply of the good decreases. Ans: B