ECON Chapter 3

At the equilibrium price for gasoline

-everyone with the desire and the income to buy gasoline at that price can do so -all sellers willing and able to sell gasoline at that price can do so. (Both statements are correct. At the equilibrium price, every seller willing and able to sell gasoline at that price can do so; and every consumer with the desire and the income to buy gasoline at that price can do so)

When there is an excess quantity supplied of a product at the current price, then

-the market price must be above equilibrium price. -the market price will tend to fall. (Both statements are true. Statement C is true. There is a surplus when the quantity supplied exceeds quantity demanded, which necessarily implies that the market price is above the equilibrium price. Statement D is also true. If there is a surplus, sellers will be frustrated by their inability to exchange at the current price, and they will lower the prices as a result. The market price will tend to fall.)

Which of the following is the correct way to describe equilibrium in a market?

At equilibrium, quantity demanded equals quantity supplied (At the equilibrium market point, quantity demanded equals quantity supplied. At any other point there is disequilibrium, if the price is below the equilibrium price, the quantity demanded exceeds quantity supplied; if above, quantity supplied exceeds quantity demanded.)

Which of the following is true of a competitive market?

Buyers and sellers have little market power. (A competitive market is characterized by many buyers and sellers of a similar or homogenous product, and no single buyer or seller can affect the market prices. The classic example of a competitive market is the market of specific agricultural products, wheat for example, where there are many farmers who each produce a very small fraction of the total production of wheat, and many buyers who each consume a tiny portion of that production. Because no single buyer or seller can affect the price of wheat, the price is taken as given. At the market price, buyers can buy all they want, and sellers can sell all they want.)

A decrease in consumer incomes will

None of the other answers is correct

If the price of music downloads decreases, which of the following is most likely to occur?

Quantity demanded will increase. (If the price for music downloads decreases, then by the Law of Demand, the quantity demanded will increase. The Law of Demand establishes that there is an inverse relationship between the quantity demanded and the price of a given good. An increase in the quantity demanded, as a result of a price decline, is represented graphically by a downward movement along the demand curve. To the contrary, a decrease in the quantity demanded, as a result of a price increase, is represented graphically by an upward movement along the demand curve. So, changes in price of a good affect the quantity demanded of that good, but the schedule (price versus quantity demanded) or the curve (price and quantity represented in the axis) remains the same. However, there are other variables besides the price that also affect demand. Some of those variables are income, the price of related goods, tastes, natural conditions, advertising, the number of consumers, etc. Whenever any of those other variables changes, then the demand schedule or the demand curve will change, and economists refer to it as a change in demand. In summary, a change in quantity demanded and change in demand are not the same thing. Whenever there is a change in price, then quantity demanded changes (inverse relationship); whenever there is a change in a variable different than price, then the demand changes. In graphical terms, the first effect is represented by a movement along the demand curve, while the second effect is represented by a movement or shift of the whole demand curve)

Which of the following would be most likely to cause a reduction in the supply of Nintendo video games?

an increase in the price of computer chips used to make Nintendo games (The computer chips are inputs in the production of the Nintendo games. The cost of the inputs is one of the factors then influence supply: If the price of the inputs increase, the cost of production increases, and as a consequence the supply of Nintendo Games decreases. This is is represented by the supply curve shifting leftward.)

A shortage currently exists in the market for strawberries. Which of the following statements is correct?

The quantity of strawberries demanded exceeds the quantity supplied and the market price is below the equilibrium price. (Of course! If a shortage currently exists in the market for strawberries, the quantity of strawberries supplied is less than the quantity demanded and the market price is below the equilibrium price.)

Interpret the following statement: "Demand exceeds the available quantity of apartment housing. If the price of apartment rentals were increased, demand would decrease and an equilibrium could be achieved."

The statement is incorrect because it confuses "demand" with "quantity demanded." (The correct statement is: "Quantity demanded exceeds the available quantity of apartment housing. If the price of apartment rentals were increased, quantity demanded would decrease and an equilibrium could be achieved". When there is an excess quantity demanded of a product at the current price, then there is a shortage (see graph below). The consumers will not find sufficient quantity offered of the product at the current price, and they would offer to pay sellers a higher price. If the price of apartment rentals were increased from PC, then the quantity demanded decreases (Law of Demand) and the quantity supplied increases (Law of Supply). As the price rises towards PE, the shortage is gradually reduced until quantity supplied equals quantity demanded and the equilibrium is restored at point E. Keep in mind that when any other factor different from the price changes, then the demand changes (the demand curve shifts). The same applies to supply.)

To an economist, a decrease in supply means a

To an economist, a decrease in supply means that for any given price, the producer is now willing to produce and sell less. A decrease in supply is represented by a shift leftward of the whole curve. The following changes or factors would result in a decrease in supply of a specific good: a) In increase in input prices, b) An increase in the price of a substitute in production, c) A decrease in the price of a complement in production, d) An expectation of higher prices in the future, e) A decline in the number of suppliers, f) New taxes that affect the cost of production, g) A drought or freezing temperatures

Which of the following is most likely to be an inferior good?

Used clothing (In economics, an inferior good is a good for which an increase in income leads to an decrease in demand, ceteris paribus. A normal good, on the other hand, is a good for which an increase in income leads to an increase in demand, ceteris paribus. Used clothing is consider to be a inferior good. If the families' income decrease, consumers would demand more used clothing. Families are more likely to buy used clothing and less likely to buy expensive new clothing. The term inferior does not make reference to the good's quality. It is used to illustrate the reverse relationship between income and demand.)

Which of the following would increase the quantity of LCD TVs demanded but would not increase the demand for LCD TVs?

a decrease in the current price of LCD TVs (A decrease in the current price for LCD TVs would increase the quantity demanded of the good (movement along the curve), however it would not increase its demand. Demand is the range of prices and quantities that form the demand curve, while quantity demanded is the specific quantity that consumers demand at a specific price. When the price changes, there is a change in quantity demanded; however, when a variable other than the good's price changes, there is a change in demand.)

Which of the following would NOT cause a change in the supply of milk?

an increase in the price of milk (An increase in the price of milk would not cause a change in the supply of milk. Rather, it would cause an increase in the quantity supplied of milk. There is a difference between supply and quantity supplied. An increase in the quantity supplied, as a result of a price increase, is represented graphically by an upward movement along the supply curve. To the contrary, a decrease in the quantity supplied, as a result of a price increase, is represented graphically by a downward movement along the supply curve.)

Which of the following would not shift the supply curve for swordfish?

an increase in the price of swordfish (An increase in the price of swordfish would not shift the supply curve for swordfish. However, it would change the quantity supplied. Be clear about the difference. You will be asked questions like this on the written tests.)

Whenever the price of Good A decreases, the demand for Good B increases. Good A and B appear to be

complements. (In general, two goods are considered complements if an decrease in the price of one causes the demand of the other to increase (an inverse relationship), or vice versa. Two good are complements if they tend to be consumed together. Tennis rackets and tennis balls are such type of goods: there is not that much that can be done with a racket alone, or with a tennis ball alone. Others examples of complement goods are computers and memory devices, printers and cartridges, and computers and software)

A supply schedule shows

how many units producers are willing and able to sell at various prices (A supply schedule shows how many units producers are willing and able to sell at various prices, ceteris paribus. The supply schedule conforms to the Law of Supply, which states than when the price of a good increases, the quantity of the good supply also increases, ceteris paribus (all other things equal).)

The supply curve shows

how the quantity produced varies with price (A supply curve does show how the quantity produced varies with the price. A supply curve shows the relationship between the quantities offered of specific a good at different prices, ceteris paribus. Each point of the curve indicates the quantity that sellers of the good are willing to sell at a specific price.)

The demand schedule for a good:

indicates the quantities that will be purchased at alternative market prices. (A demand schedule indicates the quantities of a given good or service that will be purchased or demanded at alternative market prices, ceteris paribus. A demand schedule is presented in a table form, which is often depicted in a graph, or represented thru a mathematical function)

The law of demand refers to the

inverse relationship between the price of a good and the quantity demanded (The Law of Demand refers to the inverse relationship that exists between the price of a good and the quantity demanded of that good. This inverse relationship implies that, other things equal, the quantity demanded of a good rises when the price of the good declines, and vice versa. The quantity demanded of a good is the amount of a good that buyers are willing and able to purchase.)

A change in which of the following variables does not cause a change in demand?

prices of unrelated goods (Changes in the prices of unrelated foods do not affect the demand of a specific good. In Economics, the related goods are the so called complements or substitutes goods. Changes in the prices of a complement or a substitute do have an impact in the demand of a specific good. If two goods are substitutes, when the price of one increases, the demand for the other also increases. If two goods are complements, when the price of one increases, the demand for the other decreases.)

Each point on the supply curve shows the

quantity supplied at that price (A supply curve shows the relationship between the quantities offered of specific a good at different prices, ceteris paribus. Each point of the curve indicates the quantity that sellers of the good are willing to sell at a specific price.)

The difference between a change in quantity supplied and a change in supply is that a change in

quantity supplied is caused by a change in a good's own, current price, while a change in supply is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes. (The difference between a change in quantity supplied and a change in supply is that a change in quantity supplied is caused by a change in a good's own, current price, while a change in supply is caused by a change in some other variable, such as input prices, prices of related goods, expectations, or taxes. A change in the quantity supplied is represented in by a movement along the supply curve: upward in the case of an increase, downward in the case of a decrease. A change in the supply is represent by a shift of the supply curve: rightward in the case of an increase and downward in the case of a decrease.)

If there is a surplus, ____ will be frustrated by their inability to exchange at the current price, and they will ____ the prices as a result.

sellers; lower (If there is a surplus, sellers will be frustrated by their inability to exchange at the current price, and they will lower the prices as a result. There is a surplus when the quantity supplied QS exceeds quantity demanded QD, a situation of temporary disequilibrium at current price PC. The surplus is represented by QS - QD (see graph below). To eliminate the surplus, frustrated suppliers would cut prices from current price PC to increase sales, buyers respond to the lower price by increasing their purchases, and this would continue until the market returns to equilibrium at point E, thus eliminating the surplus.)

The market supply schedule reflects the total quantity

supplied at each price by all of the producers. (The market supply schedule reflects the total quantity of a good or service supplied at each price by all producers. The market supply schedule results from summing, for any given price, the quantities that each individual producer is willing to produce and sell.)

An upward-sloping supply curve shows that

suppliers are willing to increase production of their goods if they receive higher prices for them (An upward-sloping supply curve shows that suppliers are willing to increase production of their goods if they receive higher prices for them. The upward-sloping supply curve is explained by the Law of Supply. The Law of Supply states than when the price of a good increases, the quantity offered by the producers also increases, ceteris paribus.)

Assume that coffee and tea are substitutes for each other. If weather conditions cause a substantial portion of the available coffee crop to be destroyed, then most probably:

the demand for tea will increase. (If weather conditions cause a substantial portion of the available coffee crop to be destroyed, the supply for coffee declines (its curve moves leftwards), causing an increase in coffees' prices and a decrease in quantity, as the demand curve for coffee remains the same (see the Coffee Market graph below). If two goods are substitutes, as coffee and tea are, an increase in the price of coffee causes some consumers to shift to the relatively cheaper tea. As a result, the demand curve for tea increases and shifts to the right, while the supply curve remains the same (see the Tea Market graph below).)

If the price of tennis rackets were to increase, we would expect

the demand for tennis balls to decrease (If the price of tennis racket were to increase, for the Law of Demand, the quantity demanded of tennis rackets will decline, and consequently the demand for tennis balls will decline as well. Two good are complements if they tend to be consumed together. Tennis rackets and tennis balls are such type of goods: there is not that much that can be done with a racket alone, or with a tennis ball alone. Others examples of complement goods are computers and memory devices, printers and cartridges, and computers and software. In general, two goods are considered complements if an increase in the price of one causes the demand of the other to decline.)

When there is an excess quantity demanded of a product at the current price, then

the price will tend to rise (Yes, the price would tend to rise. When there is an excess of quantity demanded of at the current price, then there is a shortage (see graph below). The consumers will not find sufficient quantity offered of the product at the current price PC, and they would offer to pay sellers a higher price, moving towards PE. Higher prices would entice suppliers to increase the quantity supplied and consumers to reduce the quantity demanded, as to ultimately eliminate the shortage.)

Ceteris paribus, if the vacancy rate in an apartment complex increased from 5% to 20% over the past two years, we would expect to see

the rent decrease leading to an increase in quantity demanded. (An increase in vacancy rates reflects a wider surplus situation: the quantity supplied further exceeds the quantity demanded of apartments for rent, a situation of temporary disequilibrium. As a result of the imbalance between supply and demand, rental prices should come down. Buyers would respond to the lower price by increasing their rentals (an increase in quantity demanded), while landlords would respond by reducing the offer of rental units (a decrease in the quantity supplied). This would continue until the market returns to equilibrium, thus eventually eliminating the surplus.)

In economics, the demand for a good refers to the amount of the good people

will buy at various prices. (In economics, the demand for a good refers to the amount of the good people would buy at different prices, other things equal, or ceteris paribus "People' could be understood as an individual, as a single family, as all families in San Marcos, or even as all families in the United States or in the whole world. The ceteris paribus condition implies that the demand refers to the different amounts demanded at different prices of a specific good, isolating other factors that could impact the demand, such as income, tastes and prices of related goods)