Section 3

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

$115

demand and quantity demanded

-demand is the entire curve; quantity demanded is a point on the demand curve -a change in quantity demanded is a movement along the demand curve; a change in demand is a shifting of the demand curve -if a price changes, quantity demanded will change; prices changes do not alter the demand curve for a good

price is important in a market economy because it

-eliminates imbalances between supply and demand -coordinates the choices of consumers and producers and brings them into harmony -serves as the rationing mechanism for the limited supplies of goods and services

The law of demand

-inverse relationship means that the price of a good and the quantity consumers wish to purchase move in opposite direction -as the price of a good increases, quantity demanded decreases -as the price of a good decreases, quantity demanded increases

the demand curve

-plots the quantity demanded for a corresponding price -always slopes downward and to the right -Y axis is price; x axis is quantity -horizontally, the demand curve shows how much of a particular good consumers are willing to buy at a given price; the height shows the maximum price consumers are willing to pay for an additional unit

supply and quantity supplied

-supply is the entire curve; quantity supplied is a point on the supply curve -a change in quantity supplied is a movement along the supply curve; a change in supply is a shifting of the supply curve -if a price changes, quantity supplied will change, but does not alter the supply curve

6 things that shift the demand curve

1. change in consumer income -increase in income -> increase in demand -> shift right 2. changes in the number of consumers in the market 3. changes in the price of a related good -if the price of a good's substitute increase, the demand for the good increases -if the price of a good's complement increases, demand for the good decreases 4. changes in expectations 5. demographic changes 6. changes in consumer tastes and preferences bonus: weather

4 things that change supply

1. changes in resource prices -when input prices decrease, supply increases 2. changes in technology -technological advancements reduce production costs and thereby increase supply 3. elements of nature 4. changes in taxes

how do producers convert resources into goods and services

1. organizing productive inputs and resources 2. transforming and combining these inputs into goods and services 3. selling the final product to consumers

If the United Auto Workers union can obtain a substantial wage increase for auto workers, there will be

a decrease in the supply of automobiles, which is a shift to the left of the supply curve

what does the supply curve tell us

always moves to the right and upward -horizontally, it shows how much of a good producers are willing to make and sell for a given price -vertically it shows the minimum price necessary to induce producers to supply an additional unit and the opportunity cost of producing an additional unit

an increase in supply will cause

an increase in quantity demanded

consumer surplus

area above the price and under the demand curve -as price rises, consumer surplus falls -as price falls, consumer surplus rises

producer surplus

area below the price and above the supply curve

The difference between the amount consumers would be willing to pay and the amount they actually pay for a good is called

consumer surplus

corn and soybeans are alternatives that could be grown by most farmers. if government subsidies for ethanol lead to higher corn prices, this will

decrease the supply of soybeans

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

demand curve has shifted to the right

if consumer purchases of a good are highly sensitive to the price of a good, this is illustrated by a

demand curve that is relatively flat (more horizontal)

If the quantity of a good supplied is highly sensitive to the price of the good, economists say the supply of the good is relatively

elastic

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

elastic

an increase in the expected future price of a good will cause the current demand for the good to

increase, which is a shift to the right of the demand curve

consumer surplus

is the difference between total willingness to pay and the total amount actually paid

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

it decreases

if price falls, what happens to the quantity demanded for a product

it increases

if price rises what happens to quantity supplied of a product

it increases

according to the law of supply

more of a good will be offered by suppliers as the price rises

a demand curve for flowers would show the

number of flowers that will be purchased at various prices

what happens when the supply curve increases

price decreases, equilibrium quantity increases

what happens when the demand curve increases

price increases, equilibrium quantity increases

a shortage occurs whenever

price is less than equilibrium price

when economists say the quantity demanded of a product has increased, they mean the

price of the product has fallen, and consequently, consumers are buying more of it

After a hurricane in Florida knocked out the regional water supply for several days, the demand for bottled water increased sharply. In a market economy, how will this increase in demand affect the equilibrium price and quantity of bottled water?

price will increase, and quantity will increase

Liam is willing to cut lawns for a minimum of $200 a week. He is, however, paid $250 for the same service by a lawn maintenance company. This is an example of

producer surplus

according to the law of supply

producers are willing to supply larger amounts of a good as its price increases

if the demand for coffee makers increases

quantity supplied will increase

a decrease in the price of milk will

reduce the demand for orange juice, a substitute for milk

consumers buy less of a good as its price increases because

substitute goods are now relatively cheaper

if the quantity of a good supplied is highly sensitive to the price of the good, this is illustrated by a

supply curve that is relatively flat (more horizontal)

elasticity of supply curves

supply is said to be inelastic when quantity supplied is not very responsive to a price change

what is the primary determinant of price elasticity of demand

the availability of substitutes

Last year, 1,000 cases of bottled water were sold at $5; this year, 1,200 cases were sold at $7. These data could be explained by the

the demand curve shifting right with no change in supply

total value

the entire portion under the demand curve to the left of quantity demanded

law of supply

the price of a good and the quantity supplied move in the same direction -as the price of a good increases, the quantity supplied increases -as price decreases, quantity supplied decreases

Shifting the demand curve

these factors can either ase an increase in demand (where the curve moves to the right) or a decrease (curve moves left)

At a price of $5, Tyrone buys 10 units of a product; when the price increases to $6, Tyrone buys 8 units. Which of the following is correct about Tyrone's behavior?

tyrone's quantity demanded has decreased, and his demand has not changed

inelastic

when quantity demanded is not very sensitive to a change in price

elastic

when quantity demanded is quite sensitive to a change in price

equilibrium

where quantity demanded equals quantity supplied