Econ Chapter 3: Demand & Supply

Equilibrium

A situation in which opposing forces balance each other. (Occurs in a market when price balances the plans of buyers and sellers)

Equilibrium quantity

Quantity bought and sold at equilibrium price

A substitute is a good that is​ _____ another​ good, and a complement is a good that is​ _____ another good.

consumed in place of; consumed together with

Equilibrium price

Price at which the quantity demanded = quantity supplied

The money price of a pack of frozen waffles is $1.75, and the relative price of a pack of frozen waffles in terms of burritos is 2.5 packs of frozen burritos per pack of frozen waffles. What is the money price of a pack of frozen burritos?

$0.70 Relative price = money price/money price of alt. 2.5=1.75/x 2.5x= 1.75 x=1.75/2.5=0.7

Substitution effect

(BUY SOMETHING CHEAPER) When relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases.

Income effect

(CANNOT AFFORD IT) When price of a good/service rises relative to income, people cannot afford all the things they previously bought, so quantity demanded of the good/service decreases

Suppose that demand increases by 200 batteries a day and supply decreases by 100 batteries a day. What is the new equilibrium price of a battery and what is the new equilibrium quantity of​ batteries?

+200 to all demands listed -100 from all supplies listed Find numbers where they are equal

Six main factors that change the supply of a good (shift)

1) Prices of factors of production 2) Prices of related goods produced 3) Expected future prices 4) The number of suppliers 5) Technology 6) State of nature

Why does price change the quantity demanded?

1) Substitution Effect 2) Income Effect

Six main factors that change demand

1) The prices of related goods 2) Expected future prices 3) Income 4) Expected future income and credit 5) Population 6) Preferences

If you demand something, then you ...

1. Want it 2. Can afford it 3. Have made a definite plan to buy it

If the money price of a cup of coffee is​ $1 and the money price of gum is 50 cents per​ pack, then the relative price of coffee in terms of gum is​ _____.

1/0.50 = 2 packs per cup

Money price

Amount of money needed to buy it

Quantity demanded

Amount that consumers plan to buy during a particular time period and at a particular price

Market

Any arrangement that allows buyers and sellers to get information and do business with each other

We observe a rise in the price of tomatoes and a decrease in the quantity of tomatoes that producers sell. The most likely explanation is that ... A) The market for tomatoes is unpredictable B) The law of demand applies to tomatoes but the law of supply does not C) The law of supply applies to tomatoes but some other influence on selling plans decreased the supply of tomatoes D) The supply curve is downward sloping

C) The law of supply applies to tomatoes but some other influence on selling plans decreased the supply of tomatoes

If demand and supply change in the same direction, we _____ the direction of the equilibrium quantity and _____ the direction of change of the equilibrium price.

Can predict; cannot predict

Ramen noodles and rice are substitutes. If the price of ramen noodles decreases, how does the demand for rice change? If the price of ramen noodles decreases, the demand for rice will _____.

Decrease, and the demand curve for rice will shift leftward

At a price above equilibrium price, a surplus forces the price _____. At a price below equilibrium price, a shortage forces the price _____.

Down; Up

Quantity supplied

Good/service is the amount that producers plan to sell during a given time period at a particular price

Competitive market

Has many buyers and sellers, so no single buyer or seller can influence the price

Which are a change in QS, which are a change in S: I) Farms are selling less chicken because the price of turkey has increased. II) Farms are selling less chicken because the price of chicken has fallen. III) Farms are selling more chicken because the price of chicken has risen. IV) Farms are selling more chicken because the cost of chicken feed has fallen.

I and IV are changes in supply II and III are changes in quantity supplied

If demand and supply curves change in the same direction: An Increase in D and S curve _____ equilibrium quantity. A decrease in D and S curve _____ equilibrium quantity. Change in equilibrium price is uncertain.

Increase Decrease

An increase in the price of wood planks, a substitute in production of wood beams, will _____ the equilibrium price of wood beams and _____ the equilibrium quantity of wood beams.

Increase; decrease

Stephan graduates from college and his income increases to $20,000 a year. Nothing else changes. Stephan decreases the quantity of ketchup and potato chips that he buys and increases the quantity of ski trips that he buys. For Stephan, _____.

Ketchup and potato chips are inferior goods

Luxury car makers forecast a decrease in households' incomes and an increase in the ease in which credit can be obtained. What do you predict will happen to the demand for luxury cars​ today?

Might increase, decrease, or remain the same

If the price of a taco rises, a _____ the supply curve occurs. If any factor that influences selling plans other than the price changes, then a _____ the supply curve occurs.

Movement up along; shift of

The law of supply

Other things remaining the same, the higher the price of a good, the greater is the quantity supplied. The lower the price of a good, the smaller is the quantity supplied

Law of demand

Other things remaining the same... the higher the price of a good, the smaller is the quantity demanded. The lower the price of a good, the higher is quantity demanded

If demand and supply curves change in opposite directions: An increase in D curve, and decrease in S curve _____ equilibrium price. A decrease in D curve, and increase in S curve _____ equilibrium price. Change in equilibrium quantity is uncertain.

Raises Lowers

Relative price

Ratio of its money price to the money price of the next best alternative good (it's opportunity cost)

Demand

Reflects a decision about which wants to satisfy

An increase in the demand for rice brings a _____ in the price of rice and _____ in the quantity of rice supplied

Rise; increase

Choose the correct statements about competitive markets. 1) A single buyer in a competitive market cannot influence the price. 2) Competitive markets exist for goods, services, money, factors of production, and inputs. 3) In a competitive market, prices are eventually driven down to zero. 4) A competitive market must be a global market.

Statements 1 and 2 are correct

What is the equilibrium price of a milkshake on the schedule?

The price at which quantity demanded and quantity supplied are equal.

Along the supply curve, _____.

The price changes but all other influences on producers' planned sales remain the same

If the price of a granola bar falls​, with all other influences on buying plans remaining the​ same, in the market for granola bars ​_______.

The quantity of granola bars demanded increases

Wants

Unlimited desires/wishes people have for goods and services

A shortage of a good forces the price _____.

Up

An RV is a normal good. If income is expected to increase next year, you predict that the demand for RVs _____ now.

Will increase

A demand curve is also a willingness-to-pay curve

Willingness to pay measures marginal benefit