Exam 1 Micro Ch.3 Review

normal good

a good for which the demand increases as income rises and decreases as income falls

Inferior good

a good that consumers demand less of when their incomes increase

The law of supply

explains the positive relationship between price and the quantity sellers are willing and able to produce

In a market economy, there is an _____________________ relationship between the price of a good and the amount of a good that buyers are willing and able to purchase.

Inverse or negative

Factors that affect demand

•Income •Changing tastes or preferences •Changes in the composition of the population •Price of substitute or complement changes •Changes in expectations about future

What is the deadweight loss of the price ceiling?

The deadweight loss shows the reduction in consumer and producer surplus that goes to nobody. They are the surplus that is forfeited because of the reduction in the total quantity sold. It is the area between the demand and supply curve and the old and new equilibria (with and without the price ceiling). That area is E + F in the graph.

When the market price of a good increases, the amount that sellers are willing to offer for sale increases. Economist call this...

The law of supply

Factors that affect supply

natural conditions, input prices, technology, government policies

What is the deadweight loss of the price floor?

That area is C+D in the graph

price ceiling

A legal maximum on the price at which a good can be sold. The price ceiling is set below the equilibrium price, it is a binding price control

price floor

A legal minimum on the price at which a good can be sold. The price floor is set above the equilibrium price

surplus

A situation in which quantity supplied is greater than quantity demanded

The figure shows the supply and demand for online music. Suppose that an economic downturn decreases household wealth and erodes consumer confidence. Move the supply and/or demand curves to reflect the primary effect this would have on the market for online music. You can assume that online music is a normal good. Also select the end result of equilibrium price and quantity.

Assuming that online music is a normal good, a fall in household wealth and consumer confidence would reduce the demand of music files at any given price. Hence, demand would shift to the left. In the new equilibrium, where supply meets the new demand, the price and quantity of music files will be lower.

Stone and brick are substitutes in home construction. Consider the market for bricks depicted in the graph. Suppose the price of stone increases due to new regulations for the stone quarrying industry. Illustrate the impact this will have on the market for bricks.

Bricks are substitutes for stone. Hence, if the price of stone increases, the quantity demanded of stone will fall, and the demand for bricks increases. This is illustrated by a shift of the demand curve to the right.

What is the consumer surplus after price floor is imposed?

Consumer surplus, area A, is the area above the price line and below the demand curve that falls to the left of the quantity sold

What is consumer surplus after price ceiling?

Consumer surplus, the area A + B + C, is the area above the price line and below the demand curve that falls to the left of the quantity sold.

The market is not in equilibrium after the price ceiling is imposed. Rather, there is a..

Shortage

The law of demand says that

as the price of a good increases, buyers are willing and able to purchase less.

Equilibrium

occurs at the price where quantity demanded equals quantity supplied

consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays. the total consumer surplus is the area below the demand curve and above the market price (forming a triangular shape

producer surplus

the difference between the price a producer receives for a good and their cost total producer surplus is the area above the supply curve up to the market price

Consumer surplus is equal to the difference between

the maximum price a buyer is willing to pay and the market price.

Demand is best described as

the quantity of a good or a service that people are willing and able to purchase at different possible prices.

Consumer surplus is shown graphically as the area

under the demand curve and above the market price

The market does not clear after the price floor is imposed. Rather, there is a..

Surplus

Suppose the market for dodgeballs is competitive and in equilibrium. What will happen in the market if: 1. Games using dodgeballs become hugely popular 2. The price of rubber, an input into the production of dodgeballs, increases Assume that all dodgeballs are made of rubber and there are no close substitutes.

- An increase in the popularity of dodgeball related games results in consumers demanding more dodgeballs at any price. This is represented by a rightward shift of the demand curve. - An increase in the price of rubber, a major input in the production of dodgeballs, causes suppliers costs to increase. Sellers now require a higher price for every quantity sold. This is represented by a leftward shift in the supply curve

Suppose the cost of lithium-ion batteries, an input into the production of electric vehicles, has dropped more steeply than expected. The accompanying graph depicts a market for electric vehicles. Demonstrate the effect of a reduction in the price of lithium-ion batteries by adjusting the accompanying diagram.

- Decrease in cost of production causes supply curve to shift to the right as producers are willing to supply more - An increase in supply, holding all else constant, causes the equlibrium price to decrease and the equilibrium quantity to increase.

What is producer surplus after price ceiling?

Producer surplus is the area above the supply curve, below the price line, and to the left of the quantity sold. In this case, producer surplus is represented by the area D.

What is producer surplus after price floor is imposed?

Producer surplus is the area above the supply curve, below the price line, and to the left of the quantity sold. In this case, producer surplus is represented by the area, B+E .

substitute goods

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls; conversely, when the price of one product rises, the demand for the other product rises.

Consider the maximum amount of a product that sellers are willing and able to provide for sale over a relevant range of prices, holding all other factors constant. Economists call this

Supply

Which phrase do we use to indicate that we are trying to study the relationship between two variables while the values of all other variables are held unchanged?

ceteris paribus