Chapter 2: Concepts/ Theory

Question 1

Quantity Demanded+ Formula

Answer 1

amount of a good or service consumers are willing to purchase during a given period of time
Q= f(P,M,Pr,T,Pe,N)

Question 2

Normal good

Answer 2

an increase in income results in more of the good purchased

Question 3

Inferior good

Answer 3

an increase in income results in less of the good purchased

Question 4

Substitute good

Answer 4

an increase in price results in demand rising for the other good

Question 5

Complement good

Answer 5

an increase in price results in demand falling for the other good

Question 6

Slope parameters

Answer 6

parameters in a linear function that measure the effect on the dependent variable (Qd) of changing the independent variables (P,M,Pr,T,Pe,N)

Question 7

Variable P’s relation to Q and sign of slope parameters

Answer 7

Inverse
Negative

Question 8

Variable M’s relation to Q and sign of slope parameters

Answer 8

For normal goods: Direct, positive
For inferior goods: Inverse, negative

Question 9

Variable Pr’s relation to Q and sign of slope parameters

Answer 9

For substitute goods: Direct, positive
For complement goods: Inverse, negative

Question 10

Variable T’s relation to Q and sign of slope parameters

Answer 10

Direct
Positive

Question 11

Variable Pe’s relation to Q and sign of slope parameters

Answer 11

Direct
Positive

Question 12

Variable N’s relation to Q and sign of slope parameters

Answer 12

Direct
Positive

Question 13

Direct demand function+ Formula

Answer 13

visualizations that show how quantity demanded relates to product price, holding all other factors constant
Qd= f(P)

Question 14

Inverse demand function+ Formula

Answer 14

when price is expressed as a function of quantity demanded
P= f(Qd)

Question 15

Law of demand

Answer 15

quantity demanded increases as price falls, and quantity demanded decreases as price rises

Question 16

Change in quantity demanded vs. Change in demand

Answer 16

Qd: change in P (price), movement along the demand curve
D: change in M, Pr, T, Pe, or N (anything other than price), shifting demand curve

Question 17

Quantity supplied+ Formula

Answer 17

amount of a good or service offered for sale during a given period of time
Qs= f(P,Pi,Pr,t,Pe,F)

Question 18

Subsitutes in production

Answer 18

an increase in the price of one good causes producers to increase the production of that good and decrease production of the other

Question 19

Complements in production

Answer 19

an increase in the price of one good causes producers to increase the production of both goods

Question 20

What is Pi? (Qs)

Answer 20

price of inputs

Question 21

What is t? (Qs)

Answer 21

technology

Question 22

What it T? (Qd)

Answer 22

time

Question 23

What is F? (Qs)

Answer 23

number of firms in the industry

Question 24

What is Pe?

Answer 24

price expectations

Question 25

What is Pr?

Answer 25

price of a related good

Question 26

What is N? (Qd)

Answer 26

number of consumers in the market

Question 27

What is M? (Qd)

Answer 27

income

Question 28

Direct supply function+ Formula

Answer 28

quantity supplied expressed by changes in price Qs= f(P)

Question 29

Change in quantity supplied vs. Change in supply

Answer 29

Qs: movement along the supply curve caused by a change in price S: shifting the supply curve as a result in changes in Pi, Pr, t, Pe, or F

Question 30

Inverse supply function

Answer 30

price as expressed as a function of quantity supplied P= f(Qs)

Question 31

Supply price

Answer 31

minimum price necessary to induce producers to offer a given quantity for sale

Question 32

Market equilibrium

Answer 32

quantity supplied and demanded where consumers can take all they want and producers can supply all they want Qd= Qs

Question 33

Surplus

Answer 33

when Qs exceeds Qd

Question 34

Shortage

Answer 34

when Qd exceeds Qs

Question 35

Economic value

Answer 35

maximum price a buyer is willing to pay for a unit

Question 36

Consumer surplus

Answer 36

difference between economic value and market price, net gain of the consumer

Question 37

Producer surplus

Answer 37

difference between market price and supply price, net gain of the producer

Question 38

Social surplus

Answer 38

sum of producer and consumer surplus, the area below the demand curve and above the supply curve on a graph

Question 39

What happens when D increases and S stays constant?

Answer 39

equilibrium price and quantity both rise

Question 40

What happens when D decreases and S stays constant?

Answer 40

equilibrium price and quantity both fall

Question 41

What happens when S increases and D stays constant?

Answer 41

equilibrium price falls and quantity rises

Question 42

What happens when S decreases and D stays constant?

Answer 42

equilibrium price rises and quantity falls

Question 43

Indeterminate

Answer 43

unpredictable changes in equilibrium price and quantity when both D and S shift at the same time

Question 44

Price ceiling+ what it causes

Answer 44

maximum price the government permits sellers to charge for a good or service, can cause shortages

Question 45

Price floor+ what it causes

Answer 45

minimum price the government permits sellers to charge for a good or service, can cause surpluses