Macroeconomics Chapter 3

price floor

A _____ ____ is a minimum price fixed by the government. A price at or above it is legal; a price below it is not.

price ceiling

A _____ _____ sets the maximum legal price a seller may charge for a product or service. A price at or below the ceiling is legal; a price above it is not. This enables consumers to obtain some "essential" good or service that they could not afford at the equilibrium price.

quantity

A change in demand must not be confused with a change in ______ demanded.

negative or inverse; law of demand

A fundamental characteristic of demand is this: Other things equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a _____ or _____ relationship between price and quantity demanded. Economists call this inverse relationship the _____ of _____.

raises; reduces

An increase in demand _____ both equilibrium price and equilibrium quantity. Conversely, a decrease in demand _____ both equilibrium price and equilibrium quantity.

reduces; increases; rises; declines

An increase in supply ____ equilibrium price but _____ equilibrium quantity. In contrast, if supply decreases, equilibrium price ____ while equilibrium quantity _____.

equilibrium price (or market-clearing price)

The ______ _____ is the price where the intentions of buyers and sellers match. It is the price where quantity demanded equals quantity supplied.

wheat; stock; foreign currencies

The focus in this chapter on markets in which large numbers of independently acting buyers and sellers come together to buy and sell standardized products. Markets with these characteristics are the economy's most highly competitive. They include the _____ market, the _____ market, and the market for _____ _____.

shortage

To impact the market, a price ceiling must be below the equilibrium price. Because the ceiling price Pc is below the market-clearing price P0, there is a lasting ____ of that product.

change in demand

A _____ in ______ is a shift of the demand curve to the right (an increase in demand) or to the left (a decrease in demand). It occurs because the consumer's state of mind about purchasing the product has been altered in response to a change in one or more of the determinants of demand.

substitute; complementary

A ______ good is one that can be used in place of another good. Ex: When the price of Colgate toothpaste declines, the demand for Crest decreases. A _____ good is one that is used together with another good.Ex: If the price of a complement (for example, lettuce) goes up, the demand for the related good (salad dressing) will decline.

quantity supplied

A change in ____ ____ is a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.

law of supply; marginal

As price rises, the quantity supplied rises; as price falls, the quantity supplied falls. This relationship is called the ____ of _____. Beyond some quantity of production, manufacturers usually encounter increases in _____ cost—the added cost of producing one more unit of output.

surplus

At any above-equilibrium price, quantity supplied exceeds quantity demanded. A result is a _____ The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price.

supply

Because supply is a schedule or curve, a change in _____ means a change in the schedule and a shift of the curve. The cause of this change is a change in one or more of the determinants of supply.

supply; demand;

Government may cope with the surplus resulting from a price floor in two ways: 1. Restricting ____ or increasing _____. 2. Purchase the surplus output at the $3 price (thereby subsidizing farmers) and store or otherwise dispose of it.

resource

Higher _______ prices raise production costs and, assuming a particular product price, squeeze profits. That reduction in profits reduces the incentive for firms to supply output at each product price. Ex: A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline.

technology

Improvements in _______ (techniques of production) enable firms to produce units of output with fewer resources. Because resources are costly, using fewer of them lowers production costs and increases supply. Ex: The development of more effective wireless technology increases the supply of cell phones.

income

The ______ effect indicates that 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.

Productive efficiency

_____ _____: the production of any particular good in the least costly way.

increase; decrease

(In a supply curve) A shift to the right, as from S1 to S2 in Figure 3.5, signifies an ______ in supply: Producers supply larger quantities of the product at each possible price. A shift to the left, as from S1 to S3, indicates a ______ in supply: Producers offer less output at each price.

benefit (MB); cost (MC)

Demand essentially reflects the marginal ______ of the good, based on the utility received. Supply reflects the marginal _____ of producing the good.

suppliers or producers

Price floors above equilibrium prices are usually invoked when society feels that the free functioning of the market system has not provided a sufficient income for certain groups of resource ______ or ______.

MB; MC; allocative

The market ensures that firms produce all units of goods for which MB exceeds MC and no units for which MC exceeds MB. At the intersection of the demand and supply curves, ____ equals ___ and ____efficiency results.

law of supply; positive, or direct

The upward slope of the supply curve reflects the ____ of ______—producers offer more of a good, service, or resource for sale as its price rises. The relationship between price and quantity supplied is ________.

independent

The vast majority of goods are not related to one another and are called ______ goods.

Equilibrium quantity ("in balance" or "at rest" quantity)

_____ _____:The quantity at which the intentions of buyers and sellers match, so that the quantity demanded and the quantity supplied are equal. There is neither a shortage nor a surplus of a product.

Demand curve

______ _____: A curve that illustrates the demand for a product by showing how each possible price (on the vertical axis) is associated with a specific quantity demanded (on the horizontal axis).

Demand

______ is a schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time. It is simply a statement of a buyer's plans, or intentions, with respect to the purchase of a product.

Supply

______ is a schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period

Government-controlled

_______ prices cause shortages or surpluses, distort resource allocation, and produce negative side effects.

quantity demanded

A change in _______ _______ is a movement from one point to another point—from one price-quantity combination to another—on a fixed demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration.

shortage (or excess demand); shortage

Any price below the equilibrium price would create a _____; quantity demanded would exceed quantity supplied. A _____ is when the amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price.

inferior

As incomes increase beyond some point, the demand for used clothing, retread tires, and third-hand automobiles may decrease because the higher incomes enable consumers to buy new versions of those products. Goods whose demand varies inversely with money income are called _____ goods.

taxes; subsidies; subsidizes

Businesses treat most taxes as costs. An increase in sales or property _____ will increase production costs and reduce supply. In contrast, _____ are "taxes in reverse." If the government _____ the production of a good, it in effect lowers the producers' costs and increases supply. Ex: An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education.

determinants of demand

But economists know that other factors can and do affect purchases. These factors, called _____ of _____, are assumed to be constant when a demand curve like D1 is drawn. They are the "other things equal" in the relationship between price and quantity demanded.They are also known as demand shifters.

Rationing; Black

By preventing these market adjustments from occurring, the price ceiling poses two related problems: 1. ______problem: Since an unregulated shortage does not lead to an equitable distribution of gasoline, the government must establish some formal system for rationing it to consumers. (rationing coupons). 2. _____ markets: gasoline is illegally bought and sold at prices above the legal limits will flourish. Counterfeiting of ration coupons will also be a problem.

expectations; increase

Changes in _______ about the future price of a product may affect the producer's current willingness to supply that product. In many types of manufacturing industries, newly formed expectations that price will increase may induce firms to add another shift of workers or to expand their production facilities, causing current supply to ______. Ex: An expectation of a substantial rise in future log prices decreases the supply of logs today.

expectations

Changes in consumer ______ may shift demand. A newly formed expectation of higher future prices may cause consumers to buy now in order to "beat" the anticipated price rises, thus increasing current demand. For example, first-round NFL draft choices may splurge on new luxury cars in anticipation of lucrative professional football contracts. Or workers who become fearful of losing their jobs may reduce their demand for, say, vacation travel.

allocative efficiency

Competitive markets also produce ____ ____: the particular mix of goods and services most highly valued by society (minimum-cost production assumed).For example, society wants land suitable for growing corn used for that purpose, not to grow dandelions. It wants diamonds to be used for jewelry, not crushed up and used as an additive to give concrete more sparkle. It wants iPods and MP4 players, not cassette players and tapes. Moreover, society does not want to devote all its resources to corn, diamonds, and portable digital media players. It wants to assign some resources to wheat, gasoline, and cell phones. Competitive markets make those allocatively efficient assignments.

quantities; prices

Demand shows the ______ of a product that will be purchased at various possible _____, other things equal.

rent control

Economic effects of ______ ____ by the government: On the demand side, the below-equilibrium rents attract a larger number of renters. However, Price controls make it less attractive for landlords to offer housing on the rental market. In the short run, owners may sell their rental units or convert them to condominiums. They are one cause of the many abandoned apartment buildings found in larger cities.

supply or surplus

Effects of price floor: At any price above the equilibrium price, quantity supplied will exceed quantity demanded—that is, there will be a persistent excess _____ or _____ of the product.

substitution

Firms that produce a particular product, say, soccer balls, can sometimes use their plant and equipment to produce alternative goods, say, basketballs and volleyballs. The higher prices of these "other goods" may entice soccer ball producers to switch production to those other goods in order to increase profits. This ______ in production results in a decline in the supply of soccer balls. Ex: An increase in the price of cucumbers decreases the supply of watermelons.

supply; prices; technology; subsidies

If one of the determinants of ______ does change, a change in supply will occur, meaning that the entire supply curve will shift. These determinants are (1) resource _____, (2) ______, (3) taxes and ______, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.

increase; decrease

If the increase in supply is larger than the decrease in demand, the equilibrium quantity will _____. But if the decrease in demand is greater than the increase in supply, the equilibrium quantity will ______.

marginal utility

In any specific time period, each buyer of a product will derive less satisfaction (or benefit, or utility) from each successive unit of the product consumed. The second Big Mac will yield less satisfaction to the consumer than the first, and the third still less than the second. That is, consumption is subject to diminishing ______ _____.

lower

In contrast, ______ resource prices reduce production costs and increase profits. So when resource prices fall, firms supply greater output at each product price.

demanders; suppliers

Markets bring together buyers ("_______") and sellers ("______").

greater; right

Other things equal, the larger the number of suppliers, the ____ the market supply. As more firms enter an industry, the supply curve shifts to the ______. Ex: An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women's professional basketball leagues increases the supply of women's professional basketball games.

rationing; allocation

Price floors not only disrupt the ____ ability of prices but distort resource ______. Ex: Without the price floor, the $2 equilibrium price of wheat would cause financial losses and force high-cost wheat producers to plant other crops or abandon farming altogether. But the $3 price floor allows them to continue to grow wheat and remain farmers. So society devotes too many of its scarce resources to wheat production and too few to producing other, more valuable, goods and services. It fails to achieve allocative efficiency.

superior; normal

Products whose demand varies directly with money income are called _____ goods, or ______ goods.

misallocated

Rent controls distort market signals and thus resources are ______: Too few resources are allocated to rental housing and too many to alternative uses. They are a primary cause of housing shortages

time period

Saying "A consumer will buy 10 bushels of corn per week at $5 per bushel" is meaningful. Unless a specific _____ _____ is stated, we do not know whether the demand for a product is large or small.

rise; fall

Supply Decrease; Demand Decrease effect on equilibrium price: If the decrease in supply is greater than the decrease in demand, equilibrium price will _____. If the reverse is true, equilibrium price will _____.

reduce

Supply Decrease; Demand Decrease effect on equilibrium quantity: the decreases in supply and demand each _____ equilibrium quantity.

increase

Supply Decrease; Demand Increase effect on equilibrium price: A decrease in supply and an increase in demand for some good (for example, gasoline) both _____ price.

decrease; increase

Supply Decrease; Demand Increase effect on equilibrium quantity: If the decrease in supply is larger than the increase in demand, the equilibrium quantity will ______. In contrast, if the increase in demand is greater than the decrease in supply, the equilibrium quantity will ____.

decrease

Supply Increase; Demand Decrease effect on equilibrium price: Both changes _____ price

increases; reduces

Supply Increase; Demand Decrease effect on equilibrium quantity: the increase in supply ______ equilibrium quantity, but the decrease in demand ______ it.

fall; rise

Supply Increase; Demand Increase effect on equilibrium price: If the increase in supply is greater than the increase in demand, the equilibrium price will ____. If the opposite holds, the equilibrium price will ____.

raise

Supply Increase; Demand Increase effect on equilibrium quantity: The increases in supply and demand both _____ the equilibrium quantity.

down; lower

Surpluses drive prices ____. Even if the $4 price existed temporarily, it could not persist. The large surplus would prompt competing sellers to ____ the price to encourage buyers to take the surplus off their hands. As the price fell, the incentive to produce corn would decline and the incentive for consumers to buy corn would increase.

substitution

The _____ effect suggests that 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 product whose price has fallen is now "a better deal" relative to the other products.

rationing function

The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent is called the _____ _____ of prices. And it is the combination of freely made individual decisions that sets this market-clearing price.

tastes (preferences); incomes; expectations

The basic determinants of demand are (1) consumers' _______, (2) the number of buyers in the market, (3) consumers' ______, (4) the prices of related goods, and (5) consumer _______.