Chapter 3: Supply and Demand
Equilibrium
a balanced or unchanging situation in which all forces at work within a system are canceled by others
In a market where government has set the maximum price below the equilibrium price, one might expect:
a black market to develop as individuals try to take advantage of unexploited opportunities. Bakery goods are highly perishable.
efficiency/ economic efficiency
a condition that occurs when all goods and services are produced and consumed at their respective socially optimal levels
the expectation of future price decrease will lead to?
a decrease in the current demand
what occurs when two goods or services are substitutes?
a decrease in the price of one will cause a leftward shift in the demand curve for the other
price ceiling
a maximum allowable price, specified by law
Change in the quantity demanded
a movement along the demand curve that occurs in response to a change in price
change in the quantity supplied
a movement along to supply curve that occurs in response to a change in price
supply curve
a schedule or graph showing the quantity of a good that sellers wish to sell at each price
change in supply
a shift of the entire supply curve
cash on the table
an economic metaphor for unexploited gains from exchange
When two people agree to a price in a negotiation, we can assume that:
both parties will benefit.
Assume the supply of land is fixed. How will an increase in the birth rate affect the equilibrium price of land? The equilibrium price of land will ___________ because ______________ for land shifts to the ____________.
increase, demand, right
When the price of a substitute falls, a demand shifts?
left, causing equilibrium price and quantity to fall
Market equilibrium
occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price
In order to understand how the price of a good is determined in the free market, one must account for the desires of:
purchasers and sellers.
an increase in income shifts the demand curve for a normal good in what direction?
right, causing equilibrium price and quantity to rise
when input prices fall supply shifts in what direction?
right, causing equilibrium price to fall but equilibirum quantity to rise
Indicate how you think each of the following would shift demand in the indicated market: a. The income of buyers in the market for Adirondack vacations increase. The demand curve ____________ b. Buyers in the market for pizza read a study linking pepperoni consumption to heart disease. The demand curve ___________ c. Buyers in the market for CDs learn of an increase in the price of downloadable MP3s (a substitute for CDs). The demand curve ___________ d. Buyers in the market for CDs learn of an increase in the price of CDs. The demand curve _____________
shifts to the right, shifts to the left, shifts to the right, remains unchanged
How would each of the following affect the U.S. market supply curve for corn? a. A new and improved crop rotation technique is discovered. The supply curve .________________ b. The price of fertilizer falls. The supply curve .________________ c. The government offers new tax breaks to farmers. The supply curve .________________ d. A tornado sweeps through Iowa. The supply curve ________________
shifts to the right, shifts to the right, shifts to the right, shifts to the left
seller's reservation price
smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost
excess demand
the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price
excess supply
the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price
Income effect
the change in the quantitiy demanded of a good that results because a change in the price of a good changes the buyers purchasing power
substitution effect
the change in the quantity desmanded for a good that results because buyers switch to or from substitues when the prices of the good changes
buyer's surplus
the difference between the buyer's reservation price and the price he or she actually pays
total surplus
the difference between the buyer's reservation price and the seller's reservation price
seller's surplus
the difference between the price received by the seller and his or her reservation price
Equilibrium price and equilibrium quantity
the price and quantity at the intersection of the supply and demand curves for the good
socially optimal quantity
the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good
Suppose that the price of doughnuts decreases and that doughnut-holes are a by-product of producing doughnuts. One would expect:
the supply of doughnut holes to decrease.
complements
two goods are complements in consumption if an increase in the price if one causes a leftward shift in the demand curve for the other (or if a decrease cayses a rightward shift)
A regulated maximum price that is above the equilibrium price:
will have no effect on the market.
Demand Curve
A schedule or graph showing the quantity of a good that buyers wish to buy aat each price
Suppose that the equilibrium price of DVD players increases and the equilibrium quantity increases. Which of the following best fits the observed data?
An increase in demand with supply constant.
Suppose that the equilibrium price of apples falls and the equilibrium quantity increases. Which of the following best fits the observed data?
An increase in supply with demand constant.
Why does your grocery store sell day-old bakery goods but not day-old canned goods?
Bakery goods are highly perishable.
What will happen to the equilibrium price and quantity of beef if consumer income increases? (Assume that beef is a normal good).
Both will increase.
What will happen to the equilibrium price and quantity of beef, if the price of chicken feed increases (assume that chicken and beef are substitutes)?
Both will increase.
How will a new law mandating an increase in required levels of automobile insurance affect the equilibrium price and equilibrium quantity in the market for new automobiles?
Equilibrium price will fall; equilibrium quantity will fall.
