Econ Chapter #3 study guide
What is a Change in Supply? (On a Graph)
A shift in the supply curve
In what sense is a supply curve a minimum-supply-price curve? How does this relate to the height of the supply curve above any particular quantity?
- A curve that shows the lowest price at which someone is willing to sell. This lowest price is the marginal cost. - The lowest price at which someone is willing to buy it is low.
Define Equilibrium:
- Happens when the price balances the plans between the buyers and the sellers - a situation in which opposing forces balance each other out.
In what sense is a demand curve a willingness-and-ability-to-pay curve? How does this relate to the height of the demand curve above any particular quantity?
- The willingness and ability to pay is a measure of marginal benefit. - If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high. But as the quantity available increases, the marginal benefit of each additional unit falls and the highest price that someone is willing to pay also falls along the demand curve.
What happens in a market when the plans of buyers and the plans of sellers don't match? Specifically, what adjusts to make sure that buying plans and selling plans are brought back into line?
- When the plans of the buyers and sellers don't match then there are too many goods produced with not enough demand (surplus) or there is not enough goods available to satisfy the demand (shortage). - The price adjusts to ration the good. Resources are automatically directed toward their most highly valued use.
If a firm supplies a good or service, three things are true. What are they?
1. The firm has the resources and technology to produce it. 2. The firm can profit from producing it. 3. The firm plans to produce it and sell it.
What is a SHORTAGE?
A situation in which quantity demanded is greater than quantity supplied
What is a SURPLUS?
A situation in which quantity supplied is less than quantity demanded
What is a competitive market?
A market that has many buyers and many sellers to get information and do business with each other.
The text discusses a total of 7 factors that influence buying plans: the price of the good plus a list of 6 other influences. What are these 6 other influences?
1. The price of related goods 2. Expected future prices 3. Income 4. Expected future income and credit 5. Population 6. Preferences
The text discusses a total of 7 factors that influence selling plans: the price of the good plus a list of 6 other influences. What are these 6 other influences?
1. The prices of the factors of production 2. The prices of related goods produced 3. Expected future prices 4. The number of suppliers 5. Technology 6. The state of nature
What is a market?
A market is any arrangement that enables s and sellers to get information and do business with each other.
What is the Substitution Effect?
As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger.
What is the Income Effect?
As the price of a product rises and people's incomes remain the same people cannot afford what they could previously buy so the demand for that good or service therefore decreases and people buy less of the product.
When supply decreases, ceteris paribus, there is a _____ at the original equilibrium price. This will force the price to _____ in order to restore equilibrium.
SHORTAGE; RISE
When demand decreases, ceteris paribus, there is a _____ at the original equilibrium price. This will force the price to _____ in order to restore equilibrium.
SURPLUS; FALL
What is responsible for the Law of Supply? Complete the following sentence: It is never worth producing a good if the price received for it does not at least cover the _____.
COST
When supply increases, ceteris paribus, there is a _____ at the original equilibrium price. This will force the price to _____ in order to restore equilibrium.
SURPLUS; FALL
What is an opportunity cost (again)?
It is the highest valued alternative forgone.
What does the Quantity Demanded refer to?
It refers to a point on a demand curve -- the quantity demanded at a particular price.
What does Demand refer to?
It refers to the entire relationship between the price of a good and the quantity demanded of that good.
A decrease in demand means that the demand curve shifts to the _____ (choose right or left)
LEFT
A decrease in supply means that the supply curve shifts to the _____ (choose right or left).
LEFT
What is a Change in Quantity Supplied? (On a Graph)
Movement along the curve
Why is the equilibrium price the best deal available for both buyers and sellers?
Neither buyers or sellers can do business at a better price. Buyers pay the highest price they are willing to pay for the last unit bought, and sellers receive the lowest price at which they are willing to supply the last unit sold.
When the price makes the quantity demanded equal to the quantity supplied, why is it the case that no one has an incentive to change it?
Nobody has incentive to change it because the quantity demanded equals the quantity supplied. The price coordinates the plans of both the buyers and sellers and since both buyers and sellers plans are satisfied an Equilibrium is reached.
What does the Law of Demand state?
Other things remain the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the greater is the quantity demanded.
What does the Law of Supply state?
Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.
When both demand and supply change but in opposite directions (one increases and the other decreases), the effect on the equilibrium _____ (choose price or quantity) is known but the effect on the equilibrium _____ (choose price or quantity) is unknown in the sense that it might increase, decrease, or remain the same.
PRICE; QUANTITY
When both demand and supply change in the same direction (either both increase or both decrease), the effect on the equilibrium _____ (choose price or quantity) is known but the effect on the equilibrium _____ (choose price or quantity) is unknown in the sense that it might increase, decrease, or remain the same.
QUANTITY; PRICE
An increase in demand means that the demand curve shifts to the _____ (choose right or left).
RIGHT
An increase in supply means that the supply curve shifts to the _____ (choose right or left).
RIGHT
When demand increases, ceteris paribus, there is a _____ at the original equilibrium price. This will force the price to _____ in order to restore equilibrium.
SHORTAGE; RISE
There are two effects responsible for the Law of Demand what are they?
Substitution Effect, Income Effect
What is the Quantity Actually Sold?
The quantity sold can be more, less or the same as the quantity supplied.
Is the quantity demanded the same as the quantity actually bought?
They aren't necessarily the same. Sometimes the quantity demanded exceeds the amount of goods available. (Quantity bought < Quantity Demanded)
What is a Change in Quantity Demanded? (On a Graph)
This is when only part of the curve shifts
What is a Change in Demand? (On a Graph)
This is when the entire curve (relationship of the curve) shifts
If a consumer demands a good or service, three things are true. What are they?
Want it Can afford it Plan to buy it
What would cause the price to deviate from its equilibrium value?
When the buyers and sellers plans don't match.
What is the Quantity Supplied?
it is the amount that producers plan to sell during a given time period at a particular price.
What does Quantity Supplied refer to?
refers to a point on the curve -- the quantity supplied at a particular price.
What does Supply refer to?
refers to the entire relationship between the price of a good and the quantity supplied of it. Supply is illustrated by the supply curve and the supply schedule.
What is relative price?
the amount of some other good or service that must be given up in exchange for a good or service.
Define quantity demanded.
the amount that consumers plan to buy during a given time period at a particular price.
What is money price?
the number of dollars that must be given up in exchange for a good or service.
Define Equilibrium Price:
the price at which the quantity demanded equals the quantity supplied.
Why does demand not change when the price of good changes with no change in the other influences on buying plans? Consider the demand for pasta The demand for pasta does not change when a change in _______ occurs. An increase in the price of pasta _______.
the price of pasta; decreases the quantity of pasta demanded and results in a movement up along the demand curve for pasta
Define Equilibrium Quantity:
the quantity bought and sold at the equilibrium price.