Economics ch 3

Price Ceiling

a legally established maximum (below equilibrium) price for a product

Price Floor

a legally established minimum (above equilibrium) price for a product

Market Supply

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

The determinants of supply: def

any factors other than the product's price that have an effect on the supply of a good or service and cause the supply curve to shift

The Law of Supply

as price rises, the quantity suppled (Qs) rises; as prices fall, the quantity supplied falls

Demand Schedule

organizes the relationship between price and quantity in a tabular format

Price and quantity supplied have a _____ relationship

positive

If the cost of production rise, the producer as incentive to ...

produce less output at every possible cost

Inferior goods

products that have decreased demand when consumer incomes rise and increased demand when consumer income falls

a demand curve measures...

quantity demanded on the horizontal axis and price on the vertical axis

Subsidy

refers to the government financial assistance for the production of a good which lowers producer' costs and increases supply

Market:

represents an institution or mechanism that brings buyers and sellers into contact

Even though prices rise and fall in a free market, ___ and ___ will always be achieved

-E price -E quantity

Interaction of buyers and sellers determine: 2

-E price -E quantity

What would decrease demand for any good or service?

-an unfavorable change in consumer tastes -a decrease in the price of a substitute good -falling incomes and the product is a normal good

Determinants of Demand: 5

-consumers' tastes -number of consumers in market -consumers income -the prices of related goods -expected prices

Reasons for the inverse relationship between price and quantity demanded

-consumption is subject to diminishing marginal utility -a higher price makes it more likely the consumer will substitute another good -people ordinarily buy more of a product at a low price than at a high price -a lower price increases the purchasing power of a buyer's income, enabling a buyer to purchase more of a product

Which of the following characteristics lead to a downward-sloping demand curve?

-diminishing marginal utility -an increase in purchasing power as market price decreases

Determinants of supply: 6

-expected prices -taxes and subsides -prices of other goods -resource prices (factor prices) -technology -number of sellers in market

Which of the following characteristics leads to an upward-sloping supply curve?

-increasing opportunity costs -increasing marginal costs

These will cause a change in supply rather than a change in quantity supplied

-number of sellers -technology -producer expectations

Reasons for the inverse relationship between price and quantity demanded: 4

-people ordinarily buy more of a product at a low price than at a high price -a higher price makes it more likely the consumer will substitute another good -consumption is subject to diminishing marginal utility -a lower price increases the purchasing power of a buyer's income, enabling a buyer to purchase more of a product

4 components of circular flow model

-resource market -households -businesses -product market

Government controlled prices cause: 3

-shortages or surpluses -distortion in resource allocation -negative side effects

Goods that affect the demand for another product due to a change in their price

-substitute goods -complementary goods

What system is characterized by the private ownership of resources and the use of markets to coordinate and direct economic activity

A market system

How do you derive a market demand curve from individual demand curves?

Add up quantities demanded by all individual consumers for each price

Demand increases and supply is held constant so...

E price AND E quantity increase

demand decreases and supply stays constant

E price falls and E quantity falls

Supply increases and demand stays constant so ...

E price falls and E quantity rises

Supply decreases and demand stays constant

E price increases and E Q will decrease

Demand decreases and supply increases

E prices fall and the change in Q is indeterminate

Monies that flow out of businesses to pay for resources are costs to businesses, but they represent these types of flow to households: 4

Money income (rent, interest, profit income, wages)

Independent goods

Not related

The supply curve illustrates the relationship between...

Price and quantity supplied

Why do prices change?

Prices change in reaction to a mismatch between quantity demanded and quantity supplied.

Unit elasticity

Product demand for which relative price changes and changes in quantity demand are equal E=1

Elastic Demand

Product demanded for which price changes cause relatively larger changes in quantity demanded E >1

Inelastic demand

Product demanded for which price changes cause relatively smaller changes in quantity demanded E<1

A shift in the demand schedule to the right, or an increase in quantity at every price does what to the elasticity?

Reduces it

A. In the latte market, demand often exceeds supply and supply sometimes exceeds demand. B. The price of a latte rises and falls in response to changes in supply and demand. In which of these two statements are the concepts of supply and demand used correctly?

Statement B because demand and supply intersect; they do not exceed each other.

Movement along demand curve caused by...

change in market price

A competitive market

consists of a large number of independently acting buyers and sellers

The _____________ incurred by firms when producing a good or service arise from the prices of the factor inputs that are used to produce said good or service

cost of production

If price floor is above equilibrium it will...

create a surplus. quantity supplied will exceed quantity demanded.

A buyer's intentions or plans in regard to the purchase of product is know as...

demand

____ factor prices raise production costs and, assuming a fixed product price, ____ profits

higher, reduce

Diminishing Marginal Utility

in any specific time period, buyers will derive less satisfaction from each additional unit of the product consumed

The law of demand describes a ____ relationship between the price of a good or service and the quantity demanded of that good or service

inverse

Price and quantity demanded have a _____ relationship

inverse or negative

The demand by a consumer for a good or service essentially reflects the ____ of the good or service, based on the utility received

marginal benefit

An e-commerce site, a gas station, a local music store and a farmer's roadside stand are all examples of a...

market

Producer expectations of future prices are a determinant of...

supply

increase in _ while holding _constant results in a decrease in equilibrium price, but an increase in equilibrium quantity

supply, demand

Marginal Cost

the added cost of producing one more unit of output

Specifically refers to demand

the buyer side of any market

Supply increases and demand increases so...

the change in E price is indeterminate and E quantity rises

Equilibrium Price:

the price where the intentions of buyers and sellers match

Economists say "price floors and ceilings stifle the rationing function of prices and distort resource allocation" because

when unrestrained, prices rise and fall to correct imbalances between the quantity supplied and quantity demanded in a market

Quantity demanded is illustrated on the ___ axis, while price is illustrated on the ___ axis

x, y