ECON midterm review chapter 3

complement goods (negative demand shifter)

Two or more goods that tend to be used together. If two goods are complements, an increase in the price of one will lead to a decrease in the demand of the other. (pen and eraser)

A change in quantity supplied results from

a change in good's own price

A change in supply results from

a change in input prices (prices cheaper, more supplied) , alternative output prices and technology

On a graph, change in quantity supplied is represented by

a movement up/ down along the same supply curve

price control

a regulation that sets a maximum or minimum legal price for a particular good

inferior good (negative demand shifter)

a good that consumers demand less of when their incomes increase

normal good (positive demand shifter)

a good that consumers demand more of when their incomes increase

price floor

set a minimum price that must be paid / buyers must pay at least the price at the price floor of HIGHER → often leads to a surplus (sellers want to sell BUT buyers don't want to buy) → example: minimum wage → surplus CAUSES unemployment rate (unemployed divide by number of employed) PROTECTS PRODUCERS / WORKERS

On a graph, change in supply is shown by

shift down / out / right OR shift up / in / left of the entire demand curve

Expectations of future output prices (positive demand shift)

"if the price is gonna go up, i'll buy more today" panic buying !

Demand increase < Supply increase

Price: increase Quantity: decrease

Demand increase > Supply increase

Price: increase Quantity: increase

If cost of production falls

Producers are willing to make more

substitute goods (positive demand shifter)

Products or services that can be used in place of each other. When the price of one falls, the demand for the other product falls. (samsung vs apple / different vendors selling the same things for different prices)

On a graph, inferior goods shift to the

RIGHT - NEGATIVE relationship between income and demand - As income INCREASES, demand DECREASES

If the price is ABOVE equilibrium price

THEN there is excess supply (surplus)

How do producers remove surplus?

They must lower their prices

A change in quantity demanded happens because of

price

As price goes UP

quantity demanded goes down

As price goes DOWN

quantity demanded goes up

A change in demand happens from

- Income - Preferences - Price of related goods

NON-BINDING PRICE CEILINGS:

- Price ceiling that is above equilibrium - price SURPLUS

BINDING PRICE CEILINGS:

- Price ceiling that is below equilibrium - price SHORTAGE

BINDING PRICE FLOORS:

- Price floor that is above equilibrium - price SURPLUS

NON-BINDING PRICE FLOORS:

- Price floor that is below equilibrium price - HAS NO EFFECT, MARKET EQUILIBRIUM PRICE WILL PREVAIL

Supply shifters

- input prices - price of alternative output - technology / productivity - expected future output price - number of firms - taxes and regulations - weather and strikes

price ceiling

A legal maximum on the price at which a good can be sold below equilibrium price (shortage occurs, lots of people want to buy but sellers don't want to sell) → example: rent control PROTECTS CONSUMER

A rightward shift in the demand curve for product C might be caused by: A) a decrease in the price of a product that is complementary to C. B) a decrease in income if C is a normal good. C) a decrease in the price of a product that is a close substitute for C. D) an increase in income if C is an inferior good.

A) a decrease in the price of a product that is complementary to C.

Jessica's marginal cost for producing a pitcher of lemonade is $0.25. Therefore, $0.25 can also be called her A) seller's reservation price. B) total cost of lemonade production. C) buyer's reservation price. D) equilibrium price.

A) seller's reservation price.

An increase in the demand for GM automobiles will eventually result in: A) a lower equilibrium price for GM automobiles. B) an increase in the quantity supplied of GM automobiles. C) an increase in the supply of GM automobiles. D) an increase in the quantity demanded of GM automobiles.

B) an increase in the quantity supplied of GM automobiles.

At the current price there is a shortage of a product. We would expect price to: A) increase, quantity demanded to increase, and quantity supplied to decrease. B) increase, quantity demanded to decrease, and quantity supplied to increase. C) increase, quantity demanded to increase, and quantity supplied to increase. D) decrease, quantity demanded to increase, and quantity supplied to decrease.

B) increase, quantity demanded to decrease, and quantity supplied to increase.

A binding price floor will: A) force some firms in this industry to go out of business. B) result in a product surplus. C) result in a product shortage. D) clear the market.

B) result in a product surplus.

Digital cameras and memory cards are complementary goods. A decrease in the price of digital cameras will: A) cause the demand curve for memory cards to become vertical. B) shift the demand curve for memory cards to the right. C) shift the demand curve for memory cards to the left. D) not affect the demand for memory cards.

B) shift the demand curve for memory cards to the right.

A decrease in the demand for recreational fishing boats might be caused by an increase in: A) the income of sports fishers. B) the price of outboard motors. C) the size and number of fish available. D) the price of sailing boats.

B) the price of outboard motors.

The rationing function of prices refers to the: A) tendency of supply and demand to shift in opposite directions. B) fact that ration coupons are needed to alleviate wartime shortages of goods. C) capacity of a competitive market to equate the quantity demanded and the quantity supplied. D) ability of the market system to generate an equitable distribution of income.

C) capacity of a competitive market to equate the quantity demanded and the quantity supplied.

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. A reduction in the number of firms producing X will: A) increase D, increase P, and increase Q. B) increase S, decrease P, and increase Q. C) decrease S, increase P, and decrease Q. D) decrease S, decrease P, and increase Q.

C) decrease S, increase P, and decrease Q.

Two recent studies conclude that increased fiber in the diet does not reduce the risk of developing colon cancer. The likely result will be that the: A) quantity of fiber demanded will fall. B) price of fiber will rise. C) demand for fiber will decrease. D) supply of fiber will increase.

C) demand for fiber will decrease.

Suppose that the supply of DVD increases while the demand for DVD decreases. One can predict that the: A) equilibrium price and quantity will rise. B) equilibrium price and quantity will decrease. C) equilibrium price will fall but the equilibrium quantity can rise or fall. D) equilibrium price will rise but the equilibrium quantity can rise or fall.

C) equilibrium price will fall but the equilibrium quantity can rise or fall.

When the price of oil declines significantly, the price of gasoline also declines. The latter occurs because of a(an): A) increase in the demand for gasoline. B) decrease in the demand for gasoline. C) increase in the supply of gasoline. D) decrease in the supply of gasoline

C) increase in the supply of gasoline.

Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates that: A) the demand for oranges will necessarily rise. B) the equilibrium quantity of oranges will rise. C) the amount of oranges that will be available at various prices has declined. D) the price of oranges will fall.

C) the amount of oranges that will be available at various prices has declined.

Change in price of good →

Change in quantity demanded / supplied

In the past few years the demand for donuts has greatly decreased. The decrease in demand might best be explained by: A) an increase in the cost of making donuts. B) an decrease in the price of coffee. C) consumers expecting donut prices to rise. D) a change in buyer tastes and preferences.

D) a change in buyer tastes and preferences.

In the following question you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X; (2) the equilibrium price (P) of X; and (3) the equilibrium quantity (Q) of X. An increase in the prices of resources used to produce X will: A) increase S, increase P, and increase Q. B) increase D, increase P, and increase Q. C) decrease S, decrease P, and decrease Q. D) decrease S, increase P, and decrease Q.

D) decrease S, increase P, and decrease Q.

Which of the following is NOT a characteristic of governmental rent controls? A) excess demand for apartments. B) fewer newly built apartment buildings. C) deteriorating quality of existing apartment buildings. D) equitable distribution of apartments.

D) equitable distribution of apartments.

On a graph, normal goods shift to the

LEFT - POSITIVE relationship between income and demand - As income INCREASES, demand INCREASES

Ceteris Paribus

Means "holding everything else constant" OR "with other conditions remaining the same"

On a graph, a change in demand is shown by

On a graph is shown by shift up / out / right OR shift down / in / left of the entire demand curve

Taste and Preferences (positive demand shifter)

celebrity endorse netflix, demand goes up "trending"

How do consumers remove deficit?

consumers must pay more / raise prices

Population (positive demand shift)

higher population, higher demand

On a graph, change in quantity demanded is shown by

movement up/down along the same curve

Season (positive demand shift)

summer = high ice cream price winter = low ice cream price

If the price is BELOW equilibrium price

there is a shortage