Chapter 3

A decrease in the number of dry cleaners in an area is represented by a(n): a) downward movement along the dry cleaning supply curve. b) upward movement along the dry cleaning supply curve. c) leftward shift in the dry cleaning supply curve. d) rightward shift in the dry cleaning supply curve. e) vertical dry cleaning supply curve.

C. The number of sellers is a non-price determinant of supply. A decrease in the number of sellers will cause the supply curve to decrease (shift to the left).

An increase in demand is reflected as a rightward (outward) shift of the demand curve and is caused by an increase in price. a) True b) False

False A change in demand (shifting of the curve) is caused by a change in one of the non-price determinants of demand. The non-price determinants of demand include income, prices of alternative goods, tastes and preferences, expectations, and population. A change in quantity demanded (movement along the curve) is caused by a change in the good's own price.

Other things being equal, a fall in the price of Coca-Cola will increase the quantity of Coca- Cola demanded. a) True b) False

True Given the inverse relationship between price and quantity demanded (law of demand), a decrease in a good's own price will cause the quantity demanded to increase (movement along the demand curve).

A shortage of product means a(n): a) excess supply of the product. b) excess demand of the product. c) situation where the quantity demanded is less than the quantity supplied. d) situation where the quantity supplied exceeds the quantity demanded. e) situation where the current market price is too high.

B. By definition, a shortage occurs when quantity demanded (QD) is greater than quantity supplied (QS) at a given price. Shortages put upward pressure on prices until equilibrium is reestablished.

Suppose A and B are substitute goods. Other things being equal, the demand curve for A will shift to the right when the price of B goes down. a) True b) False

False Substitute goods are consumed in replacement of each other, so there is a direct relationship between the price of one good and the demand for its substitute. When the price of good B decreases, the quantity demanded of good B increases (consumers will purchase more of good B) instead of its substitutes (good A). Note that the price of good A has not changed but consumers are purchasing less - this is a decrease (leftward shift) in demand for good A.

According to the law of supply, price and quantity supplied are inversely related, ceteris paribus. a) True b) False

False The law of supply states that the quantity of a product supplied is directly related to its price, ceteris paribus.

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.

A. The law of demand, by definition, states that the quantity demanded is inversely related to its price, ceteris paribus. Thus, the law of demand shows the relationship between a good's own price and the quantity of the good that consumers are willing to purchase.

If the current market price is above the equilibrium price, then: a) the quantity demanded exceeds the quantity supplied. b) there will be a shortage. c) the quantity supplied will exceed the quantity demanded. d) the price will have to increase to establish equilibrium. e) demand will shift to the left.

C. When price is above the equilibrium price, the quantity supplied (QS) will be greater than quantity demanded (QD) which is a surplus. Surpluses put downward pressure on prices until equilibrium is reestablished.

The supply curve reflects the: a) inverse relationship between price and quantity offered. b) positive relationship between demand and supply. c) negative relationship between price and quantity bought. d) positive relationship between price and quantity bought. e) positive relationship between price and quantity offered.

E. The supply curve shows the relationship between the good's own price and the quantity that sellers are willing to sell at that price. Since producers are willing to make greater quantities available at higher prices, there is a positive (or direct) relationship between prices and quantity supplied - in other words, the supply curve is upward sloping. The direct relationship between price and quantity supplied is formally stated in the law of supply.

Equilibrium in a market exists when there is neither a surplus nor a shortage of the item. a) True b) False

True By definition, equilibrium occurs when the quantity supplied (Qs) is equal to the quantity demanded (QD) at a given price. Since a shortage occurs when QD > QS and a surplus occurs when QS > QD, then equilibrium means there is neither a shortage or a surplus.