Chapter 3: Demand, Supply, and Market Equilibrium

Question 1

What is a market?

Answer 1

any institution or mechanism that brings together buyers (“demanders”) and sellers (“suppliers”) of a particular good or service.

Question 2

What is demand?

Answer 2

a schedule of prices and the quantities that buyers would purchase at each of these prices during a selected period of time

Question 3

What does the law of demand state?

Answer 3

that there is an inverse or negative relationship between price and quantity demanded. Other things equal, as price increases, buyers will purchase fewer quantities and as price decreases they will purchase more quantities

Question 4

What are 3 possible explanations for the law of demand?

Answer 4

diminishing marginal utility, income effect, substitution effect

Question 5

What is diminishing marginal utility?

Answer 5

After a point, consumers get less satisfaction or benefit from consuming more and more unit

Question 6

What is the income effect?

Answer 6

a hihger price for a good decreases the purchasing power of consumers’ incomes so they can’t buy as much of the good

Question 7

What is the substitution effect?

Answer 7

a higher price for a good encourages consumers to search for cheaper substitutes and thus buy less of it

Question 8

What is a demand curve?

Answer 8

a line with a downward slope and is a graphical representation of the law of demand

Question 9

What is market demand?

Answer 9

a sum of all the demands of all consumers of that good at each price

Question 10

What are the determinants of demand?

Answer 10

consumer tastes, the number of buyers in the market, consumer’s income, the prices of related goods, and consumer expectations

Question 11

What is a normal good?

Answer 11

a good where income and demand are positivey related

Question 12

What is an inferior good?

Answer 12

a good where income and demand are inversely related

Question 13

What is a substitute good?

Answer 13

a good that can be used in place of another

Question 14

What is a complementary good

Answer 14

A good that is used with another good

Question 15

What does a change in demand mean?

Answer 15

that the entire demand curve or schedule has changed because of a change in one of the determinants of demand

Question 16

What does a change in the quantity demanded mean?

Answer 16

that there has been a movement along an existing demand curve or schedule because of a change in price

Question 17

What is supply?

Answer 17

a schedule of prices and the quantities that sellers will sell at each of these prices during some period of time

Question 18

What does the law of supply show?

Answer 18

a positive relationship between price and quantity supplied. Other things equal, as the price of the good increases more quantities will be offered for sale and that as the price of te good decreaes, fewer quantities will be offered for sale

Question 19

What is the supply curve?

Answer 19

a graphhic representation of supply and the law of supply; it has an upward slop indicating the positive relationship between price and quantity supplied

Question 20

What are the determinants. of supply?

Answer 20

resource prices, technology, taxes and subsidies, prices of other goods, price expectation, and the number of sellers in a market

Question 21

What does a change in supply mean?

Answer 21

the entire supply curve or schedule has changed because of a change in one of the determinants of supply

Question 22

What does a change in quantity supplied mean?

Answer 22

there has been a movement along an existing supply curve or schedule because of a change in price

Question 23

What is the equilibrium price of a product?

Answer 23

the price at whcih quantity demanded and quantity supplied are equal

Question 24

When is there a surplus?

Answer 24

when the price of a product is above the market equilibrium price

Question 25

When is there a shortage?

Answer 25

if the price of a product is below the market equilibrium price

Question 26

What is the rationing function of prices?

Answer 26

the elimination of surpluses and shortages of a product

Question 27

What is productive efficiency?

Answer 27

when the goods and services society desires are being produced in the least costly way

Question 28

What is allocative efficiency?

Answer 28

when resources are devoted to the production of goods and services society most highly values

Question 29

What does a price ceilign do?

Answer 29

prevents price from performign its rationing function in a market system, and creates a shortage at the gocernment set price

Question 30

What does a price floor do?

Answer 30

creates a surplus at the fized price