CH 3 DEMAND & SUPPLY

income effect

A lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than before. A higher price has the opposite effect.

price floor

A minimum price fixed by the government. Ex: minimum wage

right

An increase in supply shifts the curve to the ________.

Determinants of Demand (aka non-price shift factors of demand)

Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price.

Determinants of Supply (aka non-price shift factors of supply)

Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price.

incomes

As ________ rise, the demand for normal goods rise.

decreases

As income falls, the demand for normal goods _______?

It will go up

As the price of beef goes up, what will happen to the demand of pork? (This is an example of prices of related goods)

substitution effect

At a lower price buyers have the incentive to substitute what is now a less expensive product for other products that are now relatively more expensive. The produce whose price has fallen is now "a better deal" relative to the other products.

Law of Demand

Consumers buy more of a good when its price decreases and less when its price increases; the principle that there is an INVERSE relationship b/w the price of a good and the QUANTITY buyers are willing to purchase in a defined period of time; holds that ceteris paribus, as the price of a good or service rises, its quantity demanded falls. The inverse is also true: As the price of a good or service falls, its quantity demanded increases.

Derived demand

Demand for 1 good causes a demand for another good.

changes in income

Demand is for different things, NOT more things

chips, chip dip; shoes, socks

Examples of complimentary goods.

bananas, watches, butter, cars

Examples of independent goods.

beef, pork

Examples of substitute goods.

shoes, scotch whiskey

Examples of superior/normal goods.

Normal Goods

Goods for which demand goes up when income is higher and for which demand goes down when income is lower. In other words, the more money we make, the more of these goods we buy. (DIRECT RELATIONSHIP b/w changes in income & demand)

Independent goods

Goods with no compliment or substitute.

by the intersection (of the demand and supply curves)

How is the equilibrium price indicated on a graph?

surplus

If the demand curve shifts inwards, and supply remains the same then there will be a ________?

Prices will go up

If the demand switches from beef to pork for too long, what will happen?

It will go down

If the price of chips go up, what will happen to the demand for chip dip? (This is an example of complimentary goods)

decrease

If two products are substitute goods, a decrease in the price of one will cause the demand for the other good to ________?

increase in taxes, changes in price level (inflation), changes in population, mobility

List 4 other (not as major) non price shift factors of demand.

changes in consumer taste, marketing efforts by business and industry, prices of related goods, changes in income, expectations of future events

List 5 non price shift factors of demand.

changes in technology, availability of resources, number of sellers in the marketplace, prices of other goods, expectations of future events

List 5 non price shift factors of supply

ramen noodles

List an example of an inferior good aka "poor man's" good.

Shift in the demand curve

Movement along the demand curve or shift in the demand curve? A booming economy spurs home sales.

Movement along the demand curve

Movement along the demand curve or shift in the demand curve? An increase in the excise tax on cigarettes causes younger smokers to quit.

Shift in the demand curve

Movement along the demand curve or shift in the demand curve? Cutting cigarette ads from TV causes cigarette smoking among teens to fall.

Shift in the demand curve

Movement along the demand curve or shift in the demand curve? Lack of snow keeps the skiers away.

Movement along the demand curve

Movement along the demand curve or shift in the demand curve? Mammoth mountain hikes the prices of tickets and sales plummet.

Movement along the demand curve

Movement along the demand curve or shift in the demand curve? Mortgage rates are at an all time low, and new home loan applications soar.

Shift in the demand curve

Movement along the demand curve or shift in the demand curve? Nike sales fall as Reebok shoes gain popularity.

Market equilibrium

Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price.

Complementary Good

Products and services that are used together (a purchase of this good may mean the purchase of a 2nd good). When the price of one falls, the demand for the other increases (and conversely)

decreases

Quantity demanded increases as price __________.

Demand

Represents the choice making behavior of consumers.

Supply

Represents the choice of producers.

down, up

Surpluses drive competitive prices ____; shortages drive them ______.

T

T or F: As income falls, demand for inferior goods (poor man's goods) rise.

T

T or F: As income goes up, we buy differently.

F

T or F: Change in demand and change in quantity demanded mean the same thing.

T

T or F: Changes in technology can cause the supply curve to shift outwards.

T

T or F: If two goods are complimentary, an increase in the price of one will cause the demand for the other to decrease.

T

T or F: Marketing efforts by business and industry can cause the demand curve to shift outwards.

T (ex: gas, cigarette prices)

T or F: The law of demand does not always work.

Equilibrium Price

The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and there is no tendency for price to rise or fall.

Law of diminishing marginal utility

The principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.

direct

The upward slope to the supply curve reflects the ________ relationship between price and quantity supplied.

Supply curve

Usually positive, up sloping from left to right and represents a "picture" of the relationship that exists between the quantity of goods that would be offered at various possible prices.

shift it out

What will a higher number of sellers in the marketplace do to the supply curve?

they seek higher profits

Why do producers produce more output when prices rise?

change in supply

a change in the schedule and a shift of the curve

Demand Curve

a graph of the relationship between the price of a good and the quantity demanded; it is USUALLY downsloping from left to right and represents an inverse relationship.

Change in Quantity demanded

a movement along the demand curve that occurs in response to a change in price; occurs because of an increase or decrease in the PRICE of a product

change in quantity supplied

a movement from one point to another on a fixed supply curve (movement along the curve)

Change in demand

a shift of the entire demand curve; increase or decrease in demand occurs because consumers' STATE OF MIND HAS BEEN CHANGED; occurs b/c of determinants of demand

Shortage

a situation in which quantity demanded is greater than quantity supplied

Surplus

a situation in which quantity supplied is greater than quantity demanded

Demand Schedule

a table that shows the relationship between the price of a good and the quantity demanded

Supply Schedule

a table that shows the relationship between the price of a good and the quantity supplied

Inferior Goods ("Poor-man's goods")

goods whose demand varies inversely with money income. When income goes down, the demand for the good goes up. (INVERSE RELATIONSHIP b/w changes in income & demand)

Substitute Good

products or services that can be used in place of each other (a good you're indifferent about). 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.

price ceiling

sets the maximum legal price a seller may charge for a product of service

allocative efficiency

the particular mix of goods and services most highly valued by society (minimum cost production assumed) Ex: society wants land good for growing corn to be used to grow corn, not dandelions.

Law of Supply

the principle that suppliers will normally offer more for sale at higher prices and less at lower prices; there is a DIRECT relationship between price and quantity supplied. As prices rise, the corresponding quantity supplied rises, as price falls, the quantity supplied falls.

productive efficiency

the production of any particular good in the least costly way

Equilibrium quantity

the quantity at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal