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### 23 Cards in this Set

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 The principle that, other things equal, an increase in a product's price will reduce the quantity of it demanded, and conversely for a decrease in price. As price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. Law of Demand What are the three explanations for the Law of Demand? 1. The law of demand is consistent with common sense. 2. Consumption is subject to diminishing marginal utility. 3. Income effect and substitution effect The ______ _______ indicates that a lower price increases the purchasing power of a buyer's money income, enabling the buyer to purchase more of the product than she or he could buy before. Income effect The ________ ______ suggests that at a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive. Substitution effect Factors other than price that determine the quantities demanded of a good or service. Determinants of demand A change in the quantity demanded of a good or service at every price. Change in demand Increase in demand is shown as a shift of the demand curve to the ______. Right Decrease in demand occurs when consumers buy less at each possible price and is indicated by a ________ shift. Left A change in the quantity supplied of a good or service at every price. Change in supply A movement from one point to another point- from one price-quantity combination to another- on a fixed demand schedule or demand curve. The cause of such a change is an increase or decrease in the price of the product under consideration. Change in quantity demanded The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and conversely for a price decrease. As price rises, the quantity supplied rises; as price falls, the quantity supplied falls. Law of supply Factors other than price that determine the quantities supplied of a good or service. Determinants of supply What are the determinants of supply? 1. Resource prices 2. Technology 3. Taxes and subsidies 4. Prices of other goods 5. Price expectations 6. Number of sellers A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right. Change in supply A movement from one point to another on a fixed supply curve. Change in quantity supplied The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific (above-equilibrium) price. Surplus The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular (below-equilibrium) price. Shortage The price in a competitive market at which the quantity demanded and the quantity supplied are equal, there is neither a shortage nor a surplus, and tehre is no tendency for price to rise or fall. Equilibrium price or market-clearing (1) The quantity demanded and supplied at the equilibrium price in a competitive market; (2) the profit-maximizing output of a firm. Equilibrium quantity Supply is constant and demand increases. An increase in demand raises both equilibrium price and equilibrium quantity. Conversely, a decrease in demand reduces both equilibrium price and equilibrium quantity. Changes in demand Demand is constant but supply increases. The new intersection of supply and demand is located at a lower equilibrium price but at a higher equilibrium quantity. An increase in supply reduces equilibrium price but increases equilibrium quantity. Changes in supply Sets the maximum legal price a seller may charge for a product or service. The rationale is that they purportedly enable consumers to obtain some "essential" good or service that they could not afford at the equilibrium price. Price ceiling The minimum price fixed by the government. A price at or above this is legal; a price below it is not. Price floor