Chapter 3
Factors that cause an increase (rightward or downward shift) in supply:
1. A decrease in the cost of materials, labor, or other inputs used in the production of the good or service. 2. An improvement in technology that reduces the cost of producing the good or service. 3. An improvement in the weather (especially for agricultural products) 4. An increase in the number of suppliers. 5. An expectation of lower prices in the future. When these factors move in the opposite direction, supply will shift left.
Supply curve
Are upward sloping with respect to price
The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power is known as the _____ of price change.
Income effect; the income effect capture the change in the quantity demanded of a good that results because a change in the price nor a good changes the buyer's purchasing power.
Along a supply curve, if the price of butter increases, the quantity of butter supplied will
Increase; as price increases, quantity supplied increases.
A maximum allowable price specified by law is a
Price ceiling
A change in demand is represented by a
Shift in the entire demand curve
A change in supply is represented by
a shift in the entire supply curve
Suppose that as the price of pencils increases, people buy fewer pencils and instead use pens. The resulting reduction in the quantity of pencils demanded is known as the ______ of a price change
substitution effect; the substitution effect captures the changes in the quantity demanded of a good that results because buyers switch into or out of substitutes as the price of the good changes.
If Jason's reservation price for a pound of apples is $1.40, and the market price for a pound of apple is $1.52, then Jason
will now buy a pound of apples; a buyer will only buy a good if his/her price for good is greater than the market price of that good
Inferior good is
A good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease
Normal good is
A good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease
A medical breakthrough that decreases the cost of treating cancer should lead to ____ in the supply of cancer treatments
An increase
A schedule or graph showing the quantity of a good that buyers wish to buy at each price is known as a
Demand curve
Failure to achieve economic efficiency means that
Everyone in the economy could be made better off Total economic surplus is not maximized
A schedule or graph showing the quantity of good that sellers wish to sell at each price is known as a
Supply curve
Buyer's surplus is
The difference between the buyer's reservation price and the price he or she actually pays
If an increase in the price of one good, cause a increase in the demand for another good, then the two goods are
Substitutes
The socially optimal quantity is
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
Factors that cause an increase (rightward or upward shift) in demand:
1. A decrease in the price of complements to the good or service 2. An increase in the price of substitutes for the good or service 3. An increase in income ( for a normal good) 4. An increased preference by demanders for the good or service 5. An increase in the population of potential buyers 6. An expectation of higher prices in the future When these factors move in the opposite direction, demand will shift left
If the price of sugar falls, this is like to lead to _______ in the supply of candy
An increase; as decrease in the price of an input will lead to an increase in supply
When price is below equilibrium
Excess demand gives buyers an incentive to bid up the price.
Suppose that as the price of movie ticked increase, people stop going to the movie as often because they can no longer afford to do so. This reduction in the quantity of movie tickets demanded is known as the ______ of a price change.
Income effect; the income effect captures the change in the quantity demanded of a good that results because a change in the price of a good changes the buyer's purchasing power.
The change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes is known as the ______ of price change.
Substitution effect; the substitution effect captures the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes.
You observe that the price of ice cream has gone up and that less ice cream is being bought and sold. The best explanation for this is that the
Supply of ice cream has decrease
Total surplus
The difference between the buyer's reservation price and the seller's reservation price
Suppose that people's incomes rise at the same time that the cost of producing cell phones falls. If cell phones are normal good, then we know that
The equilibrium quantity of cell phones will go up. But the price could go up or down; if cell phones are a normal good, and the fall in the cost of producing cell phones will increase supply. Together these shifts imply that equilibrium quantity will go up, but price could go up or down.
Two goods are complements if
an increase in the price of one causes a fall in demand for the other
A buyer's reservation price is the
largest dollar amount the buyer would be willing to pay for a good
A change in quantity demanded is represented by
movement along the demand curve
When the market is in equilibrium
quantity demanded equals quantity supplied
A change in the quantity supplied is represented by
a movement along the supply curve
Seller's reservation price is generally equal to
- the marginal cost of producing another units of the good - the smallest dollar amount for which a seller would be willing to sell an additional unit
Seller's surplus is
the difference between the price received by the seller and his or her reservation price
