Economics - Chapter 3

What is the difference between in "change in demand" and "change in quantity demanded"?

"change in demand" - refers to a shift of the demand curve "change in quantity demanded" - refers to a movement along the demand curve as a result of a change in the product's price.

What is "ceteris paribus"?

- "everything else equal" - holding everything else constant when examining the relationship between two variables

What happens if the current price is below the equilibrium price?

- the quantity demanded will be greater than the quantity supplied, and there will be a shortage. - A shortage causes the market price to rise toward equilibrium.

What happens in a market if the current price is above the equilibrium price?

- the quantity supplied will be greater than the quantity demanded, and there will be a surplus -A surplus causes the market price to fall toward equilibrium

What are the buyer's behavior on the demand schedule?

-tastes/preferences -quality -prices -budget /income -prices of related goods

What is shortage?

a situation in which the quantity demanded is greater than the quantity supplied.

What is the difference between a change in supply and a change in the quantity supplied?

A "change in supply" refers to a shift of the supply curve, while a "change in quantity supplied" refers to a movement along the supply curve as a result of a change in the product's price.

What is the substitution effect?

An increase in the price of a product raises the relative price of the product versus other products, causing consumers to substitute away from the higher priced product.

Explain why an increase in the price of a product causes a decrease in the quantity of demand.

Due to the substitution effect and the income effect.

True or False: If the demand and supply for a product both increase, the equilibrium price of the product must also increase.

False (it depends on whether the demand shifts more than the supply curve)

True or False: If the demand for a product decreases and the supply of the product increases, the equilibrium price of the product increases, depending on whether supply or demand has shifted more.

False (the price will definitely decrease)

What is quantity demanded?

How much buyers are willing and able to buy at a given price, other things being equal.

What is quantity supplied?

How much sellers or producers are willing and able to sell or produce at a given price, other things being equal.

What the income effect?

The increase in the price of the product also causes a decrease in the real income of consumers, and assuming that the product is a normal good, leads consumers to buy less of the product.

What is the law of demand?

The law of demand states that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase (and when the price of a product rises, the quantity demanded of the product will decrease); an inverse relationship.

What is the law of supply?

The law of supply states that, holding everything else constant, a direct relationship of an increase in price that causes an increase in the quantity supplied (and a decrease in price causes a decrease in the quantity supplied).

What are the main variables that will cause the demand curve to shift?

The main variables that will cause a demand curve to shift include: 1) changes in the prices of a related good—substitutes or complements 2) changes in income 3) changes in tastes 4) changes in population or demographics 5) changes in expected future prices

What are the main variables that will cause a supply curve to shift?

The main variables that will cause a supply curve to shift include: 1) changes in the prices of inputs used to make the product 2) technological change 3) changes in the prices of substitutes in production (other things that the producers could be making) 4) changes in expected future prices 5) changes in the number of firms.

A student writes the following: "Increased production leads to a lower price, which in turn increases demand." Do you agree? Why or why not?

The student's reasoning is incorrect. He should have said: "Increased production leads to a lower price, which increases the quantity demanded. There is a movement along the demand curve, but the demand curve does not shift."

True or False: If the demand and supply for a product both increase, the equilibrium quantity of the product must also increase.

True

Briefly explain whether you agree with the following statement: "When there is a shortage of a good, consumers eventually give up trying to buy it, so the demand for the good declines, and the price falls until the market is finally in equilibrium."

You should disagree. If there is a shortage, firms will raise the prices they charge. The quantity supplied will increase, the quantity demanded will decrease, and equilibrium will be reached at a higher price.

What is a demand curve?

a curve that shows the relationship between the price of a product and the quantity of the product demanded

What is a supply curve?

a curve that shows the relationship between the price of a product and the quantity of the product supplied.

What is a demand schedule?

a table showing the relationship between the price of a product and the quantity of the product demanded

What is a supply schedule?

a table that shows the relationship between the price of a product and the quantity of the product supplied.

Briefly explain whether each of the following statements describes a change in supply or a change in the quantity supplied: a. To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output.

a. Change in quantity supplied: A movement up the supply curve.

For each of the following pairs of products, state which are complements, which are substitutes, and which are unrelated. a. gasoline and electric car batteries b. houses and household appliances c. UGG boots and Kindle e-readers d. iPads and Kindle e-readers

a. Substitutes b. Complements c. Probably unrelated d. Substitutes

b. The success of the Apple iPad leads more firms to begin producing tablet computers.

b. Change in supply: The supply curve shifts to the right.

c. In the six months following the Japanese earthquake and tsunami in 2011, production of automobiles in Japan declined by 20 percent.

c. Change in supply: The supply curve shifts to the left.

What is is market equilibrium?

the situation in which the quantity demanded equals the quantity supplied.

What is surplus?

the situation in which the quantity demanded is less than the quantity supplied.