Module 3

Suppose Martin just bought a guitar from Jackson off Craigslist for $110. Martin's reservation price was $140, and Jackson's reservation price as $100. The seller's surplus from this transaction was __ dollars.

$10. Seller's surplus is the difference between the amount the seller receives and the seller's reservation price, which in this case is $110-100 = $10.

What are the 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.

A change in quantity demanded is represented by

a movement along the demand curve

changes in the quantity demanded

a movement along the demand curve that occurs in response to a change in price

A change in the quantity supplied is represented by

a movement along the supply curve

change in the quantity supplied

a movement along the supply curve that occurs in responds to a change in price

demand curve

a schedule or graph showing the quantity of a good that buyers wish to buy at each price

A change in supply is represented by

a shift in the entire supply curve

change in demand

a shift of the entire demand curve

change in supply

a shift of the entire supply curve

What factors would lead to an increase in supply?

a technological advance that lowers production costs 2. a decrease in the cost of inputs to the production process

If announcement leads home buyers to believe that house prices will go up in the future, then this should lead to a __ in the current demand for houses.

an increase

If butter and popcorn are complements, then a decrease in the price of butter will lead to __ in the demand for popcorn.

an increase

What is a seller for the pizza market?

the individuals or companies that either do sell - or might, under the right circumstances, sell pizza.

buyer's reservation price

the largest dollar amount the buyer would be willing to pay for a good. In most markets, buyers have different reservation prices.

market

the market for any good consists of all buyers or sellers of that good

equilibrium price and equilibrium quantity

the price and quantity at the intersection of the supply and demand curves for the good

socially optimal quantity

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good

excess supply

when price exceeds equilibrium price, there is excess supply, or surplus, the difference between quantity supplied and quantity demanded.

If Jason's reservation price for a pound of apples is 1.40, and the market price for a pound of apples is 1.52 then Jason

will not buy the pound of apples. A buyer will only buy a good if his or her reservation price for that good is greater than the market price of that good.

the efficiency principle

Efficiency is an important social goal because when the economic pie grows larger, everyone can have a larger slice.

equilibrium

a balanced or unchanging situation in which all forces at work within a system are canceled by others. For instance, in physics if a ball is hanging off a spring, the spring is pulled down by gravity just slightly bending downward, yet the ball on the spring is also held upward by the string, resulting in the ball not moving, hence, equilibrium. In economics, a market is at equilibrium when no participant in the market has a reason to alter his or her behavior, so that there is no tendency for production or prices in that market to change.

efficiency (or economic efficiency)

a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels

If Red bull and coke are substitutes, then a decrease in the price of Red Bill should lead to:

a decrease in the amount of coke bought and sold a decrease in the price of coke because as the price of red bull falls, the demand for coke will fall, leading to a decrease in the equilibrium price and quantity of coke.

If butter and popcorn are complements, then an increase in the price of popcorn will lead to

a decrease in the equilibrium quantity of butter

Which factors would lead to an increase in demand?

a decrease in the price of a substitution product

price ceiling

a maximum allowable price, specified by law

The numbers below likely capture the daily __ of tennis balls $0.50 / 300 $1.00 / 200 $1.50 / 100

demand

A schedule or graph showing the quantity of a good that buyers wish to buy at each price is known as a ______

demand curve

Buyers surplus

difference between buyer's reservation price and the price he or she actually pays. For example, buyer's reservation cost is $3/slice pizza, cost of pizza is $2/slice. 3-2 = $1 for buyers surplus

A maximum allowable price specified by law is a

price ceiling

excess demand (or shortage)

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price

income effect

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. For instance, people just can't afford expensive pizza..

substitution effect

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. For example, if the price of pizza shoots up, people will buy burgers instead because burgers are more affordable than pizza, hence, "substitution"

If hot dogs and ketchup are complements, then an increase in the price of ketchup will lead to:

a decrease in the price of hot dogs a decrease in the number of hot dogs bought and sold in the market

inferior good

a good whose demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decreases. For example, if an apartment was located in an inconvenient, unsafe neighborhood then if that tenant's income increased, they could easily move into a better place for a little bit more money, so their current landlord would possibly lower the rent to keep the current tenant.

normal good

a good whose demand curve shifts rightward when the incomes of buyers increase and leftward when the incomes of buyers decrease

supply curve

a graph or schedule showing the quantity of a good that sellers wish to sell at each price. Keep in mind that for example, someone with little education and work experience, like a teenager, opportunity cost would be low when selling pizza at a pizza stand compared to someone like a professional athletes opportunity cost, which would be prohibitively high. Hence, the supply curve would be upward sloping with respect to price.

If Hulu Plus and Netflx are substitutes, then an increase in the price of Netflix should lead to __

an increase in the price of hulu plus becfause the demand for hulu will increase an increase in the number of people who subsribe to hulu plus

Two goods are complements if

an increase in the price of one good, leads to a decrease (leftward shift) in the demand for the other

Two goods are substitutes if

an increase in the price of one good, leads to an increase (rightward shift) in the demand for the other.

If an increase in the price of one good, causes a decrease (leftward shift) in the demand for another good, then the two goods are

complements

If bagels and cereal are substitutes, then a decrease in the price of bagels will lead to __ in the demand for cereal.

decrease

market equilibrium

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price. Note that "satisfied" doesn't mean sellers wouldn't want more money for their product or that buyers wouldn't be happier spending less money for the product, yet satisfied refers to that sellers wish to sell all they want to sell at that price and buyers buy the product at their preferred price.

A change in demand is represented by a

shift in the entire demand curve

Suppose that as the price of movie tickets increase, people go to the movies less often and instead rent movies at home. The resulting reduction in the quantity of movies demanded is knows as the __ of a price change.

substitution effect Which means it captures the changes in quantity demanded of a good that results because buyers switch into or out of substitutes as the price of the good changes.

A schedule or graph showing the quantity of a good that sellers wish to sell at each price is known as a __

supply curve

The numbers below likely capture the daily __ tennis balls. $0.50 / 100 $1.00 / 200 $1.50 / 300

supply of. As the price of a product increases, the quantity supplied increases.

Relative to the summer months, people have less exposure to the sun during the winter. Thus relative to the Summer, we can expect

the demand for sunscreen to be lower in the winter the amount of sunscreen bought and sold in the market to be lower in the winter the price of sunscreen to be lower in the winter

total surplus

the difference between the buyer's reservation price and the seller's reservation price. ex: sellers reservation price $2 buyer's reservation price = $4 . Seller sells for $3. $4-$2 = $2 total surplus.

seller's surplus

the difference between the price received by the seller and his or her reservation price. Ex: seller's reservation price = $2. They sell pizza for $3 . 3-2 = $1 for seller's surplus.

Suppose that people's income rises at the same time that the cost of producing cell phones fall. If cell phones are a 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, then the increase in people's incomes will increase demand, and the fall in the cost of producing cell phones will increase supply. Together, these shifts imply that equilibrium will go up, but the price could go up or down.

seller's reservation price

the smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost. It is the smallest dollar amount for which she would not be worse off if she sold an additional unit.

increase in quantity demanded

this describes a downward movement along the demand cruve as price falls.

What is a buyer for the pizza market?

similarly, a buyer of the pizza market , is someone who buys, or might buy pizza.

substitutes

two goods are substitutes in consumption if an increase in the price of one causes a rightward shift in the demand curve for the other (or if a decrease causes a leftward shift) for example, if pizza was $3 and burgers were $3, then pizza rose to $5, more people would buy burgers. Hence, less pizza would sell which on a graph looking at demand for burgers, would shift right becuase there is an increase of demand for burgers.

The most John is willing to pay for a slice of pizza is $2.56, thus 2.56 is ______

John's reservation price for pizza. A buyer's reservation price is the largest dollar amount the buyer would be willing to pay for the good.

The equilibrium principle (also called the no-cash-on the table principle)

a market in equilibrium leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action

Prozac and wellbutrin bother medications to treat depression. If the price of prozac increases, then this should lead to:

an increase in the price of wellbutrin an increase in the number of people who use wellbutrin

Suppose your roommate lost his part time job and you notice that his consumption of ramen noodles increase. This suggests that for your roommate noodes are __

an inferior good.

Suppose that as the price of coffee increases, consumes purchase less coffee in part because they can no longer afford to buy as much coffee as they used to. This reduction in the quantity of coffee demanded is known as the __ of a price change.

income effect. This captures the change in the quantity demanded of a good that results because of a change in the price of a good changed the buyer's purchasing power.

The introduction of rent controls lead to which of the following?

poorer maintenance of rent-controlled apartments discrimination against tenants on the basis of race, religion, or other factors.

The smallest dollar amount for which a seller would be willing to sell an additional unit of a good is the ________

seller's reservation price A seller's reservation price is the smallest dollar amount for which a seller would be willing to sell an additional unit of a good.

increase in demand

this describes an outward shift of the demand curve

horizontal interpretation of the demand curve

this tells us how much consumers are willing to buy given various prices

complements

two goods are complements in the consumption if an increase in the price of one causes a leftward shift in the demand curve for the other (or if a decrease causes a rightward shift) . In other words, one affect the other. For example, tennis courts and tennis balls are complements of each other.