Economics ch 3
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
a demand curve measures...
quantity demanded on the horizontal axis and price on the vertical axis
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
Independent goods
Not related
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
____ factor prices raise production costs and, assuming a fixed product price, ____ profits
higher, reduce
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
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
Supply increases and demand increases so...
the change in E price is indeterminate and E quantity rises
Determinants of Demand: 5
-consumers' tastes -number of consumers in market -consumers income -the prices of related goods -expected prices
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
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
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)
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
Price Ceiling
a legally established maximum (below equilibrium) price for a product
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
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
Diminishing Marginal Utility
in any specific time period, buyers will derive less satisfaction from each additional unit of the product consumed
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
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
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
Marginal Cost
the added cost of producing one more unit of output
Specifically refers to demand
the buyer side of any market
