Ch. 3: Demand and Supply

Sole Proprietorship

a firm owned by one individual

product markets

markets in which firms supply goods and services demanded by households

Factor markets

Markets in which households supply factors of production—labor, capital, and natural resources—demanded by firms.

circular flow model

Model that provides a look at how markets work and how they are related to each other.

model of demand and supply

Model that uses demand and supply curves to explain the determination of price and quantity in a market.

shortage

The amount by which the quantity demanded exceeds the quantity supplied at the current price.

quantity supplied

The quantity sellers are willing to sell of a good or service at a particular price during a particular period, all other things unchanged.

stock market

The set of institutions in which shares of stock are bought and sold.

law of supply

Then the price of a good rises, the quantity of the good supplied increases, holding constant all other factors that influence sellers' decisions.

supply curve

a graphical representation of a supply schedule

demand curve

a graphical representation of the demand schedule.

Dividends

profits distributed to shareholders

retained earnings

profits kept by a company

increase is a shift to the....

right

corporate stock

shares in the ownership of a corporation

An expectation that the price of a good will rise in the future increases the current demand for the good,...

shifting the demand curve right ward.

surplus

the amount by which the quantity supplied exceeds the quantity demanded at the current price

equilibrium price

the price at which quantity demanded equals quantity supplied

equilibrium quantity

the quantity demanded and supplied at the equilibrium price

According to the law of demand, what happens when the price of a robotic sandwich stuffer decreases? A. The demand for robotic sandwich stuffers decreases B. The demand for the stuffing used by sandwich stuffers decreases C. The quantity supplied of robotic sandwich stuffers increases D. The quantity demanded of robotic sandwich stuffers increases. E. The supply of robotic sandwich stuffers decreases

D. The quantity demanded of robotic sandwich stuffers increases. Explanation: The law of demand suggests that price and quantity demanded change in opposite directions. When the price of a good decreases, its quantity demanded increases.

Which of the following is the best explanation of why the price adjusts following an increase in supply? A. Price adjusts automatically when supply changes B. At the initial price, there will be a surplus after supply increases. Price must fall until the quantity demanded and quantity supplied are equal again. C. At the initial price, there will be a shortage after supply increases. Price must fall until the quantity demanded and quantity supplied are equal again. D. At the initial price, there will be a surplus after supply increases. Price must rise until the quantity demanded and quantity supplied are equal again. E. At the initial price, there will be a shortage after supply increases. Price must rise until the quantity demanded and quantity supplied are equal again. Stuck?Review related articles/videos or use a hint.

B. At the initial price, there will be a surplus after supply increases. Price must fall until the quantity demanded and quantity supplied are equal again. explanation: At the initial equilibrium the quantity supplied at that price will be the same as quantity demanded. After supply increases, quantity supplied will be greater at every price, which leads to a surplus until price adjusts.

Owen saw that the price of peaches had gone down, and so he decided to buy more peaches. Based on this information only, what does Owen's reaction reflect? A. Owen's demand for peaches has increased. B. Owen's quantity demanded for peaches has increased. C. Owen has experienced an increase in income. D. Owen observed that there has been an increase in the price of other fruit, a substitute for peaches. E. Owen expects future price changes.

B. Owen's quantity demanded for peaches has increased. explanation: A change in quantity demanded is a change in the quantity that a buyer is willing to buy in response to a price change.

change in quantity demanded

a movement along the demand curve that shows a change in the quantity of the product purchased in response to a change in price

complements

two goods for which an increase in the price of one leads to a decrease in the demand for the other

A fall in the price of a substitute decreases the demand for a good,...

shifting the demand curve leftward.

A rise in the price of a complement decreases the demand for a good,...

shifting the demand curve leftward.

demand schedule

A table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged.

inferior good

a good for which demand decreases when income increases

normal good

a good for which demand increases when income increases

A rise in the price in a market for an alternative product or in a different market for the same product decreases the supply in the market in question,...

shifting the supply curve leftward.

A fall in the price of an input increases supply,...

shifting the supply curve rightward.

partnership

a firm owned by several individuals

Demand Shifter

A variable that can change the quantity of a good or service demanded at each price.

Supply Shifter

A variable that can change the quantity of a good or service supplied at each price.

Which of the following terms describes a situation in which there is an excess quantity demanded in a market? A. Shortage B. Efficiency C. Surplus D. Equilibrium E. Excess supply

A. Shortage

Which of the following terms describes a situation in which there is an excess quantity supplied in a market? A. Efficiency B. Surplus C. Excess demand D. Shortage E. Equilibrium

B. Surplus

Under what conditions will total economic surplus change the most in a market as a result of a change in demand? A. When supply is very elastic and demand is very inelastic. B. When supply is very inelastic and demand is very elastic. C. When supply is very elastic and demand is very elastic D. When supply is perfectly inelastic and demand is elastic E. When supply is very inelastic and demand is very inelastic

C. When supply is very elastic and demand is very elastic explanation: When both supply and demand are very elastic, quantity changes the most in response to any change in the market. As a result, total surplus changes the most in a market where supply and demand are both very elastic.

All of the following influence whether a consumer buys more of a good EXCEPT: A. how much income the consumer has to spend B. a change in the good's price C. how much other goods cost D. how much the consumer previously spent on the good E. whether or not it is legal to buy more of the good

D. how much the consumer previously spent on the good Explanation: A rational agent ignores costs that have already occurred because you can't change the past.

Which of the following best describes the law of supply? A. Sellers set the price that demanders pay. B. Producers sell the same amount of a good no matter its price. C. Supply is infinite. D. Legal authorities regulate markets. E. As price increases, quantity supplied increases.

E. As price increases, quantity supplied increases. Explanation: The law of supply describes the relationship between price and quantity supplied. According to the law of supply, price and quantity supplied have a positive relationship: if price increases, so does the quantity supplied.

What happens to the price and quantity of cheese sold if the demand for cheese increases and the supply of cheese decreases? A. Price decreases; quantity doesn't change. B. Price increases; quantity stays the same. C. Price decreases; we do not know what happens to quantity. D. Price decreases; quantity increases. E. Price increases; we do not know what happens to quantity.

E. Price increases; we do not know what happens to quantity. Explanation: In any market, when demand increases, both price and quantity increase. But, when supply decreases, price increases, and quantity decreases. An increase in demand and a decrease in supply have an opposite effect on quantity, so we cannot predict what will happen to quantity with certainty when demand increases and supply decreases.

Law of Demand

For virtually all goods and services, a higher price leads to a reduction in quantity demanded and a lower price leads to an increase in quantity demanded.

change in quantity supplied

Movement along the supply curve caused by a change in price.

The supply curve

The market supply curve for a good shows how much of the good sellers are willing to offer over a certain period of time at each given price, holding constant all other factors that influence their decisions

corporations

a firm owned by shareholders who own stock in the firm

In which of the following scenarios would we definitely know that price will increase but we'd be unable to determine how quantity changes? A. D↑ and S↓ B. D↑ and S no change C. D↓ and S↓ D. D↓ and S↑ E. D↑ and S↑

A. D↑ and S↓ explanation: An increase in demand and decrease in supply both put upward pressure on price but have the opposite impact on quantity, so we know price will increase but are unable to determine how quantity will change.

Law of demand

When the prices of a good rises, the quantity of the good demanded decreases, holding constant all other factors that influence consumers' choices.

An expectation that the price of a good will rise in the future decreases the current supply of the good,...

shifting the supply curve leftward.

An increase in the number of sellers in a market increases the market supply,...

shifting the supply curve rightward.

Technological advances in the production of a good increase the supply of the good,...

shifting the supply curve rightward.

supply schedule

a table that shows quantities supplied at different prices during a particular period, all other things unchanged.

Markets

The institutions that bring together buyers and sellers.

An increase in a consumer income or wealth increases...

the demand for a normal good and decreases the demand for the inferior good.

change in demand

a shift in a demand curve

change in supply

a shift in the supply curve

Demand curve

The market demand curve for a good shows how much of the good offered in the market consumers are willing to buy over a certain period of time at each given price, holding constant all other factors that influence their choice.

The market demand depends on the number of potential buyers:

The more potential buyers are in the market, the greater the demand.

Which of the following best describes a market in equilibrium? A. At the current price, quantity supplied equals quantity demanded. B. At the current price, quantity supplied is greater than the quantity demanded. C. At the current quantity, the price sellers charge is more than what buyers are willing to pay. D. At the current price, quantity supplied is less than quantity demanded. E. At the current quantity, buyers are willing to pay more than sellers receive.

A. At the current price, quantity supplied equals quantity demanded.

Emily is a rational consumer who gets utility from socks and music lessons, and she considers both of these goods normal goods. Her marginal utility from socks is 50 utils and the price of socks is $5 per pair. Her marginal utility from music lessons is 600 utils and the price of music lessons is $60. If the price of music lessons falls to $20, which of the following best describes the income and substitution effects? A. The income effect is that she got a raise from her employer. The substiution effect is that music lessons are now relatively cheaper so she will buy more music lessons. B. The income effect is that she effectively has more money to spend on either good. The substitition effect is that she will only buy socks now. C. The income effect is that she now can spend more on both goods. The substitution effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons. D. The income effect is that she will no longer buy socks because she has more income to spend on music lessons, so she will only buy music lessons. E. The substitution effect is that she now can spend more on either good. The income effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons.

C. The income effect is that she now can spend more on both goods. The substitution effect is that the price of music lessons relative to socks has decreased so she will definitely buy more music lessons. explanation: The income effect is that for each music lesson she had purchased before, she now has an extra $40 to spend on socks or on music lessons, so she might buy more of both. The substitution effect is that the relative price of music lessons to socks has decreased from $60/$5 to $20/$5

Pam considers t-shirts and gym classes to be complementary goods. How will Pam react if the price of gym classes increases? A. Her quantity demanded of gym classes will decrease, and her demand for t-shirts will be unaffected. B. Her quantity demanded of gym classes won't change, and her demand for t-shirts will increase. C. Her quantity demanded of gym classes will increase, and her demand for t-shirts will increase. D. Her quantity demanded of gym classes will increase, and her demand for t-shirts will decrease. E. Her quantity demanded of gym classes will decrease, and her demand for t-shirts will decrease.

E. Her quantity demanded of gym classes will decrease, and her demand for t-shirts will decrease. explanation: Based on the law of demand, we know that if the price of gym classes increases, then Pam's quantity demanded will decrease. If two goods are complements, then a decrease in the quantity of one causes a decrease in the demand for the other.

A government is concerned about whether young children in a community are receiving enough healthcare. Which of the following is the LEAST likely to increase the amount of healthcare that people provide their children? A. Lowering regulations on who can provide healthcare, such as allowing nurses to provide healthcare rather than just doctors B. subsidize healthcare C. reduce the distance traveled to get healthcare D. Provide coupons for free healthcare E. increase the price of healthcare

E. increase the price of healthcare explanation: If you increase the price of healthcare, it might induce more sellers to provide it, but it also discourages buyers from buying it.

quantity demanded

the quantity that buyers are willing and able to buy of a good or service at a particular price during a particular period, all other things unchanged.

substitutes

two goods for which an increase in the price of one increases in the demand for the other

According to the law of supply, what happens when the price of a good increases? A. The supply curve shifts to the right. B. People are willing to buy what is supplied. C. The quantity supplied increases. D. The supply curve shifts to the left. E. The supply curve flattens out.

C. The quantity supplied increases. Explanation: The law of supply states price and quantity supplied are positively related. When the price of a good increases, sellers are willing to sell more of a good.