Chapter 3 Micro

opportunity cost of production

the total economic cost of producing a good or service

What happens to equilibrium price and quantity when there is a decrease in demand and an increase in supply?

A decrease in demand and an increase in supply will cause a fall in equilibrium price, but the effect on equilibrium quantity cannot be determined. 1. For any quantity, consumers now place a lower value on the good, and producers are willing to accept a lower price; therefore, price will fall. The effect on output will depend on the relative size of the two changes.

What is producer surplus?

Actual price is higher than the minimum price. On the graph, Producer Surplus is the area above supply, out to quantity and up to price.

What happens to the equilibrium price and quantity when there is an increase in demand?

An increase in demand will cause the equilibrium price to rise; quantity supplied will increase.

What are two goods that can be considered substitutes?

Example- you need a mode of transportation. You buy either a car or a motorcycle.

assume two good are complements (like bikes and bike helmets),if the price of bikes drops, what happens to the price of helmets?

It will also drop because less of each good will be consumed.

Why is the demand curve downward sloping?

diminishing marginal utility The marginal benefit you receive from an item falls as you gain more of the item. The only way to get you to buy more is to lower the price.

what is market equilibrium?

in a free market,a single price will exist which brings demand and supply into equilibrium, called equilibrium price.

Law of Demand

inverse relationship between price and quantity demanded So, when price rises, qty demanded falls. When price falls, qty demanded rises.

What is the invisible hand?

personal self interest directed by market prices is a powerful force in promoting economic progress.--Adam Smith

what is the role of profits and losses in a market economy?

profits reward producers for making things people want to buy at prices they are willing to pay, losses punish producers for producing things people don't want at a cost consumers are not willing to cover. Losses are the market's way of punishing producers for wasting resources.

How do markets respond to changes in supply and demand? What is the procedure?

1. Identify the change 2. Determine if supply or demand is affected and how 3. Daw and read graph or reason through the change.

How do consumers react to price changes?

1. The substitution effect- when the price of one good falls, people substitute away from the more expensive goods to the cheaper goods. 2. Income effect= when the price of one good falls, real consumer income rises so people buy more (it is like getting a raise). Both cause the demand curve to be downward sloping.

loss

when a business's expenses are more than its revenues

What happens to equilibrium price and quantity when there is a decrease in demand?

A decrease in demand will cause the equilibrium price to fall; quantity supplied will decrease.

What happens to equilibrium price and quantity when there is a decrease in supply?

A decrease in supply will cause the equilibrium price to rise; quantity demanded will decrease.

What is a market?

A market is a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange

What happens to equilibrium price and quantity when there is an increase in demand and a decrease in supply?

An increase in demand and a decrease in supply will cause an increase in equilibrium price, but the effect on equilibrium quantity cannot be determined. 1. For any quantity, consumers now place a higher value on the good,and producers must have a higher price in order to supply the good; therefore, price will increase. The effect on output will depend on the relative size of the two changes.

What happens to equilibrium price and quantity when there is an increase in supply?

An increase in supply, all other things unchanged, will cause the equilibrium price to fall; quantity demanded will increase.

Why is the supply curve upward sloping?

At a higher price, a product is usually more profitable so a firm has a stronger incentive to make more.

Assume two goods are substitutes, like apples and oranges. What happens to the demand of oranges, when the price of apples goes up?

Because consumers substitute one good for another, the demand quantity for apples will go down and the demand quantity for oranges will go up- if the price of apples go up. Similarly, if the price of apples falls, then the quantity demanded of apples will go up and the quantity demanded for oranges will go down.

The reason for the law of demand can best be explained in terms of (a) supply (b) complementary goods (c) the rationing function of prices (d) diminishing marginal utility

D

Assume two goods are substitutes, like apples and oranges. What happens to the demand of oranges, when consumer want more apples?

Demand for oranges falls and the demand curve shifts left

Assume two goods are substitutes, like apples and oranges. What happens to the demand of oranges, when consumer want less apples?

Demand for oranges increases and the demand curve shifts right.

Assume two goods are substitutes (like apples and oranges). Consumer preferences change and they want less apples. What changes- demand or demand quantity?

Demand. Quantity demanded only changes when price changes.

Assume two goods are substitutes (like apples and oranges). Consumer preferences change and they want more apples. What changes- demand or demand quantity?

Demand. Quantity demanded only changes when price changes.

What is the difference between demand and quantity demanded?

Find out why the consumer is buying more of less of something. If price is the reason, then quantity demanded changes and it moves along the demand curve. If it is any other reason, but price, then demand changes and the curve shifts.

What is the difference between supply and quantity supplied?

Find out why the firm is producing more or less? If price is the reason, then quantity supplied changes (moves along the supply curve). If any variable besides price is the reason, then supply changes and the whole curve shifts.

What are complement goods?

Goods usually consumed at the same time. An increase in price for the first good will decrease demand for the second. A decrease in price for the first good will increase demand in the second good.

What is elasticity of demand?

How much consumers respond to a given price

What happens to equilibrium price and quantity when both demand and supply decrease?

If both demand and supply decrease, there will be a decrease in the equilibrium output, but the effect on price cannot be determined. 1. If both demand and supply decrease, consumers wish to buy less andfirms wish to supply less, so output will fall. However, since consumers place a lower value on each unit, but producers are willing to supply each unit only at higher prices, the effect on price will depend on the relative size of the two changes.

What happens to equilibrium price and quantity when both demand and supply increase?

If both demand and supply increase, there will be an increase in the equilibrium output, but the effect on price cannot be determined. 1. If both demand and supply increase, consumers wish to buy more and firms wish to supply more so output will increase. However, since consumers place a higher value on each unit, but producers are willing to supply each unit at a lower price, the effect on price will depend on the relative size of the two changes.

What are the things than can change demand?

Income Number of consumers Price of related goods (substitutes and complements) Expectations Demographics Tastes and Preferences

Assume two goods are substitutes (apples and oranges) and the price of apples rises. What changes- demand or demand quantity?

Quantity demanded changes when price is involved.

What are the things that can change supply?

Resource prices Technology Nature Political Taxes

profit

The financial gain made in a transaction

Law of Supply

The positive relationship between price and quantity supplied. When price rises, quantity supplied rises. When price falls, quantity supplied falls. (Quantity supplied is the number of a good you made).

What are substitute goods?

The price of one good is tied to the demand for another good. The two goods are used in place of each other. An increase in price in one will increase demand in the substitute good.

When the price of a good increases, why is a firm usually willing to make more of it?

They will get more for what they make

assume two good are complements (like bikes and bike helmets),if consumer preferences changes so that they wanted less bikes, what happens to the demand for helmets.

They would also demand less helmets because both goods are consumed at the same time. Similarly, if the demand for bikes goes up, the demand for helmets goes up.

True of false. Equilibrium is a unique point.

True

What are two goods that could be considered complements?

Two goods that are bought and used together, for example a bicycle and a bicycle helmut.

what factors other than price determine how much a first makes?

When price changes, quantity supplied changes but supply does not change. (this is movement along the supply curve) When something else changes, supply changes. This is movement of the entire curve.

When the price of a good increases, why do you usually buy less of it?

You can do without it, or you find a less expensive substitute.

What is an example of the invisible hand?

You stop at a red light and go on green because it is better for you in the long run. You know you will avoid tickets and accidents. This is an example of the invisible hand.

What is economic efficiency?

market outcome in which marginal benefit to consumers of last unit produced equals the marginal cost of production and which sum of the consumer surplus and producer surplus is maximized

What is demand?

relationship between price and quantity demanded 1. When price changes, quantity demanded changes, but demand does not change. This is the movement along the demand curve. 2. When something else changes, the relationship changes and then demand changes. This is the movement of the entire curve.

What is consumer surplus?

the amount a buyer is willing to pay minus the amount the buyer actually pays. On the graph, it is the area below demand, out to quantity and down to price.

Assume two goods are complements (like bikes and bike helmets). If consumer preferences change, what will change--the demand or the quantity demanded?

the demand will change because price is not involved