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74 Cards in this Set

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ECONOMICS CHAPTER 3
ECONOMICS CHAPTER 3
How is the US problem of scarcity dealt with
mainly thru markets - markets determine the price and quantity of goods produced
Define demand:
the willingness and abilty of buyers to buy different quantities of a good at different prices
Define law of demand
the price and the quantity demanded of a good are inversely related: the relationship between price and quantity demand is expressed in law of demand
What is an inverse relationship
as the value of one variable increases the value of other variables decrease
What does the law of demand indicated in reference to inverse relationships
as the price of a good increases the quantity demanded of the good decreases. As the price of a good decreases the quantity demanded of the good increases
What is a substitution effect
because of scarcity a consumer will have only limited income. therefore, a consumer will substitute lower-priced goods for higher priced goods - thus substitution effect
What 2 reasons do we have for the inverse relationship between price and quantity demanded caused by scarcity
substitution effect and income effect
Define income effect
Because of scarcity, a consumer will haveonly limited income. When price of good decreases, consumer's income has greater buying power allowing more quantity of the good. When price of good increases, consumer has less buying power.
How do we illustrate the inverse relationship between price an dqunatity demand
demand schedule is a table showing the different combinations of price and quantity demanded for a good
What are some deteriminants of demand
1. Income
2. Preferences
3. prices of related goods (substitues or complements)
4. # of buyers
5. expectations of future price
Explain income as it relates to determinants of demand
1. For normal goods, income & demand are directly related: increased income causes increase demand - curve shifts R. 2. For inferior goods, income & demand are inversely related: increase income causes decrease in demand - curve shifts L.) eg: used clothing
Explain preferences as it pertains to determinants of demand
if consumer preference for a good increases the demand for good increases - curve shift R. If preference for good decreases, demand for good decreases - shift L.
Discuss prices of related goods (substitutes or complements) as it pertains to determinants of demand
the demand for a good is directly related to the price of substitute. If Y is sub for X, an increase price for Y will cause increase in demand for X
Discuss number of buyers as it pertains to determinants of demand
an increase in the # buyers for a good will increase the demand for the good. A decrease in # of buyers will decrease the demand
Discuss the expectations of future price as it pertains to determinants of demand
if buyers expect price of good to rise in future, demand for good now will increase. If buyers expect price to fall in future, demand for good will now decrease
How is a change in demand caused
change in one of the determinants of demand
What does a shift to the right mean in reference to change in demand versus change in quantity demanded
shift to right is an increase in demand
What does a shift to the left mean in reference to change in demand versus change in quantity demanded
shift to left is a decrease in demand
A change in quantity demanded is a cuased by
change in price
An increase in price will cause
a decrease in quantity demanded - upward movement along the demand curve
a decrease in price will cause
an increase in quantity demanded - movement downward along the demand curve
Define supply
the willingness and ability of sellers to sell different quantities of a good at different prices
What is the relationship between price and quantity supplied is expressed how
in the law of supply: as the price of a good increases, the quantity supplied of the good increases
How is the relationship between price and quantity supplied illustrated
supply schedule or supply curve
What factor would cause thesupply curve to shift to the R (increase) or L (decrease)
determinant of supply shifts suply curve
An increase in the cost of production will cause a ______ in supply. A decrease in the cost of production will cause an _______ in supply
decrease, increase
What common factors can change the cost of producing a good
1. price of labor and other inputs
2. Technology
3. Taxes
What is equilibrium
putting demand and supply together
What is meant by a free market
prices are free to adjust up or down in response to demand and supply
This is the price where quantity demanded equals quantity supplied
equilibrium price
How do we determine equilibrium price and quantity for a good
the demand curve and supply curve for the good is plotted on a graph. Equ. price and quant occur where 2 curves intersect
Define surplus
if market price is above equilibrium price teh quantity supplied will exceed the quantity demanded
Define shortage
if market price is below equil price, the quant demanded will exceed the quantity supplied
This results in a an equilibrium price, eliminates surplus or shortage and generally results in the most efficient quantity of output
free market
What is the producer's surplus
the difference between the lowest price a seller is willing to accept and the price actually received
What determines equilibrium price and quantity
demand and supply
What is a price ceiling
the maximum legal price
What is a price floor
minimum legal price
Fill in the blank: ______ is the willingness and ability of buyers to buy different quantities of a good at different prices
demand
Fill in the blank: according to the law of demand, the price and the quantity demanded of a good are ______ related
inversely
Fill in the blank: For ____ goods, income and demand are directly related
normal
Fill in the blank: For ____ goods, income and demand are inversely related
inferior
Fill in the blank: _____ is the willingness and ability of sellers to sell different quantitiesof a good at different prices
supply
Fill in the blank: According to the law of supply, the price and the quantity supplied of a good are _____ related
directly
Fill in the blank: The determinant of supply is the ____ of ____
cost, production
Fill in the blank: An increase in the cost of production will cause a(n) ___ in supply
decrease
Fill in the blank: _____ advance is the ability to produce more output per resource
technological
Fill in the blank: A _________ is a market in which price is free to adjust up or down in response to demand and supply
free market
Fill in the blank: _____ price is the price where quantity demanded equals quantity supplied
equilibrium
Fill in the blank: A ___ is when quantity supplied exceeds quantity demanded
surplus
Fill in the blank: A ____ is when quantity demanded exceeds quantity supplied
shortage
Fill in the blank: A price ____ is a maximum legal price
ceiling
Fill in the blank: A price ____ is a minimum legal price
floor
Chris is iven a dollar each day to buy hsi breakfast. He normally buys 2 dognut (.45 each). Today the donut is .30 and he is buys 3. This is the:
a. substituion effect
b. income effect
c. both
d. none
b - income effect
An increase in the demand for donuts could be caused by:
a. an increase in the # of buyers
b. a decrease in teh cost of producing donuts
c. a decrease in the price of donuts
d. all of the above
a - an increase in the # of buyers
A good for which an increase in income causes an increase in demand is:
a. complement
b. substitute
c. normal good
inferior good
c - normal good
If an increase in the price of Y causes a decrease in the demand for Z, goods Y and Z must be:
a. normal goods
b. complements
c. substitues
d. inferior goods
b - complements
Which of the following will cause a change in demand for good A
a. a decrease in the cost of producing A
b. a decrease in the price of good A
c. A decrease in the # of buyers for Good A
d. All of the above
c - a decrease in teh # of buyers
A movement along the demand curve caused by a change in price is:
a. change in supply
b. change in quantity supplied
c. change in demand
d. change in quantity demanded
d - a change in quantity demanded
An increase in the price of donuts will cause:
a. a decrease in thedemand for donuts
b. a decrease in the quantity demanded of donuts
c. a decrease in the demand for bagels
d. all of the above
b - a decrease in the quantity demanded of donuts
If the price of gasoline doubles what is likely to happen to the demand for public transportation
a. decreases
b. increases
c. stays the same
d. none
b - increases
If the demand for public transportation increases resulting in a higher market price, this will cause:
a. an increase in the supply of public transportation
b. a rightward shift in the supply curve for public transportation
c. an increase in the quantity supplied of public transportation
d. none
c - an increase in the quantity supplied of public transportation
An increase in teh supply of diet books could be caused by:
a. an increase in the number of people wanting to lose weight
b. an increase in the equilibrium price of diet books
c. a decrease in the cost of producing diet books
d. all of the above
c - a decrease in teh cost of producing diet books
Free market equilibrium will generally occur:
a. where there is no surplus or shortage
b. where marginal benefit equals marginal cost
c. where thesum of consumer's surplus and producer's surplus is maximized
d. All of the above
d - all of the above
If demand decreases and supply increases, what happens to price
a. increases
b. decreases
c. stays same
d. cannot be determined
b - decreases
Assuming a market originally in equilibrium, an increase in supply would lead to;
a. price increase, quantity increase
b. price increase, quantity decrease
c. price decrease, quantity increase
d. price decrease, quantity decrease
c - price decrease, quantity increase
A surplus is an indication that the market price is:
a. below equilibrium
b. above equilibrium
c. at equilibrium
d. none
b - above equilibrium
Assuming a market originally in equilibrium, a decrease in teh number of buyers would lead to:
a. price increase, quantity increase
b. price increase, quantity decrease
c. price decrease, quantity increase
d. price decrease, quantity decrease
d - price decrease, quantity decrease
If there is an increase in enrollment in economics classes, what will happen in the market for economics textbooks
a. price increase, quantity increase
b. price increase, quantity decrease
c. price decrease, quantity increase
d. price decrease, quantity decrease
a - price increase, quantity increase
If the government imposes a price ceiling in a market, this will tend to create:
a. surplus
b. shortage
c. more exchanges
d. all of the above
b - shortage
When a price control is imposed:
a. the number of exchanges will increase
b. producer's surplus and consumer's surplus are reduced
c. the market operates more efficiently
d. both a and c
b - producer's surplus and consumer's surplus are reduced
Explain the reason for the direct relationship between price and quantity supplied
the seller's goal of profit-maaximization. For seller to make profit, the price must be sufficient to cover the seller's cost of production. higher selling price then easier to cover production and greater quantity supplied
What is a price ceiling? List 4 results that a price ceiling will lead to
maximum legal price.
1. shortage
2. fewer exchanges than at equilibrium
3. use of non-price rationing devices
4. illegal transactions at prices above ceiling