Chapter 2

Question 1

Supply curve

Answer 1

Relationship between the quantity of a good that producers are willing to sell and the price of the good.

Question 2

Variables that affect Supply

Answer 2

1. When production costs decrease, output increases no matter what the market price happens to be. The entire supply curve thus shifts to the right.
2. Movements along the supply curve: change in the quantity supplied.
3. Shift of the supply curve itself: Change in supply.

Question 3

Demand Curve:

Answer 3

Relationship between the quantity of a good that consumers are willing to buy and the price of the good.

Question 4

Demand curve slopes downward

Answer 4

Consumers are usually ready to buy more if the price is lower. For example, a lower price may encourage consumers who have already been buying the good to consume larger quantities.

Question 5

Income effecting the Demand curve:

Answer 5

With greater incomes, consumers can spend more money on any good and some consumers will do so for most goods.

Question 6

Shifting the Demand Curve:

Answer 6

A higher income would increase quantity demanded, because this increase would occur no matter what the market price, the result would be a shift to the right of the entire demand curve.
Change in demand refer to shifts in demand curve. Change in quantity demanded apply to movements along the demand curve.

Question 7

Substitutes

Answer 7

Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.

Question 8

Complements

Answer 8

Two goods for which an increase in the price of one leads to a decrease in the quantity demanded of the other.

Question 9

Equilibrium (or Market clearing) price

Answer 9

Price that equates the quantity supplied to the quantity demanded

Question 10

Market Mechanism

Answer 10

Tendency in a free market for price to change until the market clears.

Question 11

Surplus

Answer 11

Situation in which the quantity supplied exceeds the quantity demanded.

Question 12

Shortage

Answer 12

Situation in which the quantity demanded exceeds the quantity supplied.

Question 13

When can we use the Supply-Demand Model?

Answer 13

When we draw and use supply and demand curves, we are assuming that at any given price, a given quantity will be produced and sold. Assumption only making sense that it is at least roughly competitive. That both sellers and buyers have little market power, little ability individually to affect market price.

Question 14

Elasticity

Answer 14

Percentage change in one variable resulting from a 1 percent increase in another.

Question 15

Price elasticity of demand

Answer 15

Percentage change in quantity demanded of a good resulting from a 1 percent increase in its price.

Question 16

Linear Demand Curve

Answer 16

Demand curve that is a straight line

Question 17

Infinitely elastic demand

Answer 17

Principle that consumers will buy as much of a good as they can get at a single price, but for any higher price the quantity demanded drops to zero, while for any lower price the quantity demanded increases without limit.

Question 18

Completely inelastic demand

Answer 18

Principle that consumers will buy a fixed quantity of a good regardless of its price.

Question 19

Income elasticity of demand

Answer 19

Percentage change in the quantity demanded resulting from a 1 percent increase in income.

Question 20

Cross-Price Elasticity of demand

Answer 20

Percentage change in the quantity demanded of one good resulting from a 1 percent increase in the price of another.

Question 21

Price Elasticity of supply

Answer 21

Percentage change in quantity supplied resulting from a 1 percent increase in price.

Question 22

Arc Elasticity of Demand

Answer 22

Price elasticity calculated over a range of prices.

Question 23

Short Run

Answer 23

One year or less.

Question 24

Long Run

Answer 24

Enough time is allowed for consumers or producers to adjust fully to the price change.

Question 25

Demand and Durability

Answer 25

Demand is more elastic in the short run than in the long run. Because goods are durable ).(cars, fridge, tv).

Question 26

Income Elasticities

Answer 26

Also differ from the short run to the long run. For most goods and services: foods, beverages, fuel, entertainment, etc. Income elasticity of demand is larger in the long run than in the short run. In the short run income elasticity of demand will be much larger than the long run elasticity.

Question 27

Cyclical Industries

Answer 27

Industries in which sales tend to magnify cyclical changes in gross domestic product and national income.

Question 28

Capacity Constraint

Answer 28

Firms face Capacity Constraints in the short run and need time to expand capacity by building new production facilities and hiring workers to staff them.

Question 29

Supply and Durability

Answer 29

For some goods, supply is more elastic in the short run than in the long run. Such goods are durable and can be recycled as part of supply if price goes up. An example is the secondary supply of metals: the supply from scrap metal, which is often melted down and re-fabricated.