Chapter 3 Review Questions

What are the main variables that cause a supply curve to shift? Give an example of each.

)When firms increase the quantity of a product they want to sell at a given price, the supply curve shifts to the right, and when firms decrease the quantity of a product they want to sell at a given price, the supply curve shifts to the left: The 5 most important variables that cause a supply curve to shift are: 1) Prices of inputs (Ex: if the price of an input [anything used in the production of a good or service.] falls, the supply of premium bottled water will increase, and the market supply curve will shift to the right) 2) Technological change (Ex: Positive technological change, refers to a situation in which a company such as PepsiCo, develops a better way to lay out the plants where LIFEWTR is bottled so that it can produce more bottles per day, using the same number of workers and amount of machinery, and results in a shift to the right, while negative technological change could result from an earthquake or another natural disaster or from a war that reduces the ability of firms to supply as much output with a given amount of inputs, and further will raise firms' costs, and cause a decrease in their profits; results in a shift of the supply curve, to the left) 3) Prices of related goods in production (Alternative goods that a firm could produce are called substitutes (crest/colgate) in production, and goods that are produced together are called complements (hamburger and bun) in production. 4) Number of firms in the market (When new firms enter a market, the supply curve shifts to the right, and when existing firms leave, or exit, a market, the supply curve shifts to the left) 5) Expected future prices, meaning that if If a firm expects that the price of its product will be higher in the future, it has an incentive to decrease supply now and increase it in the future (Ex: if Coca-Cola believes that prices for premium bottled water are temporarily low—perhaps because of a recession—it may store some of its production of smart-water today to sell later on, when it expects prices to be higher.)

What do economists mean by shortage?

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

What is a demand schedule?

A table that shows 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.

Use the substitution effect and the income effect to explain why an increase in the price of a product causes a decrease in the quantity demanded.

The substitution effect refers to the change in the quantity demanded of a good that results because a change in price makes the good more or less expensive relative to other goods that are substitutes, and the income effect of a price change refers to the change in the quantity demanded of a good that results because a change in the good's price increases or decreases consumers' purchasing power, and although analyzed separately, both occur simultaneously whenever a price changes: An increase in the price of a product causes a decrease in quantity demanded because of the income and substitution effects - More specifically the substitution effect is the decrease in quantity demanded because the product is more expensive relative to other goods and the income effect is the decrease in quantity demanded owing to the decline in consumers purchasing power

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

A change in demand refers to a shift of the demand curve: A shift occurs if there is a change in one of the variables—other than the price of the product—that affects the willingness of consumers to buy the product, while a 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 the difference between a change in supply and a change in quantity supplied?

A change in supply refers to a shift of the supply curve - The supply curve will shift when there is a change in one of the variables—other than the price of the product—that affects the willingness of suppliers to sell the product, 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 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 do economists mean by market equilibrium?

A market outcome where quantity supplied is equal to quantity demanded.

What is the law of supply?

A rule that states that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

What are the main variables that will cause the demand curve to shift? Give an example of each.

A shift of a demand curve is an increase or a decrease in demand; 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 (The income that consumers have available to spend affects their willingness and ability to buy a good) 3) changes in tastes (An advertising campaign for a product can influence consumer demand) 4) changes in population or demographics (As the population of a country increases, the number of consumers will increase, as will the demand for most products: Pays respect to age, race, and gender. 5) changes in expected future prices (Ex: If enough consumers become convinced that the price of houses will be higher in three months, the demand for houses will increase now, as some consumers try to beat the expected price increase)

What do economists mean when they use the Latin expression ceteris paribus?

All else equal; Is the requirement, clarifying that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.

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

If the current price of a good or service is above the market equilibrium​ price, there is is an excess/surplus supply of such a good/service in that market, meaning producers are willing to sell more than consumers are willing to buy. This mismatch between demand and supply will cause the price to decrease. Firms will decrease the price they charge for their limited demand and consumers will pay the lower price to get one of the many available.

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

If the price is below the equilibrium price, there will be excess demand for the product (shortage of supply), since the quantity demanded exceed quantity supplied, meaning consumers are willing to buy more than producers are willing to sell. This mismatch between demand and supply will cause the price to rise. Firms will increase the price they charge for their limited supply and consumers will pay the higher price to get one of the few one available.

What is the law of demand?

The inverse relationship between the price of a product and the quantity of the product: 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. The law of demand holds for any market demand curve. Economists have found only a very few exceptions to this law.

If, over time, the demand curve for a product shifts to the right more than the supply curve does, what will happen to the equilibrium price?

When demand curve shifts to the right, the shift causes a shortage at the original equilibrium price, and to eliminate the shortage, the equilibrium price rises and the equilibrium quantity rises. When demand curve shifts to the left, the equilibrium price and quantity both decrease.

What do economists mean by surplus?

When economists speak of a surplus, they mean a situation in which the quantity supplied exceeds quantity demanded, the market price is above the equilibrium price, or a situation in which firms have unsold goods piling up

What will happen to the equilibrium price if the supply curve shifts to the right more than the demand curve?

Whether the equilibrium price in a market rises or falls over time depends on whether demand shifts to the right more than does supply: When demand shifts more to the right than supply, the equilibrium price rises, When supply shifts more to the right than demand, equilibrium price falls. If demand curve shifts to the right and supply curve also shifts to the right, the equilibrium quantity will increase, while the equilibrium price may rise, fall, or remain the same.