CHAPTER 5

Question 1

What is demand?

Answer 1

Demand is the various amounts of a product that consumers are willing to purchase at each of a series of possible prices during a specified period of time.

Question 2

What does a demand schedule reveal?

Answer 2

It reveals the relationship between the various prices of the product and the quantity of the product a particular consumer would be willing and able to purchase at each of these prices.

Question 3

What is the Law of Demand?

Answer 3

Ceteris paribus, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.

Question 4

What is diminishing marginal utility?

Answer 4

It refers to the decrease in added satisfaction or utility gained from consuming additional units of a product.

Question 5

What is a demand curve?

Answer 5

A graphical representation of the relationship between the price of a product and the quantity demanded.

Question 6

What is market demand?

Answer 6

Market demand is the total quantity demanded by all individual consumers at each of the various possible prices.

Question 7

What is the most important determinant of quantity demanded?

Answer 7

Price.

Question 8

What happens to quantity demanded when the price decreases?

Answer 8

Quantity demanded increases.

Question 9

What are ‘demand shifters’?

Answer 9

Factors other than price that cause the demand curve to shift to the right or left.

Question 10

What effect do consumers’ tastes have on demand?

Answer 10

Changes that make the product more desirable will increase demand.

Question 11

How does the number of buyers in the market affect demand?

Answer 11

An increase in the number of buyers likely increases product demand.

Question 12

What are normal goods?

Answer 12

Products whose demand varies directly with money income.

Question 13

What are inferior goods?

Answer 13

Products whose demand varies inversely with money income.

Question 14

What is a substitute good?

Answer 14

A product that can be used in place of another one.

Question 15

What is a complementary good?

Answer 15

A product that is used together with another one.

Question 16

What is the effect of consumer expectations on demand?

Answer 16

Higher future price expectations may cause consumers to buy now, increasing current demand.

Question 17

How does population growth affect demand?

Answer 17

Higher population increases demand for necessary goods.

Question 18

What defines supply?

Answer 18

Supply is the various amounts of a product that producers are willing to make available for sale at each of a series of possible prices during a specified period of time.

Question 19

What does a supply schedule show?

Answer 19

It reveals the relationship between the various prices of the product and the quantity that a particular supplier is willing to supply.

Question 20

What is the Law of Supply?

Answer 20

Ceteris paribus, as price falls, the quantity supplied falls, and as price rises, the quantity supplied increases.

Question 21

What factors affect a producer’s decision to supply a good?

Answer 21

Resource prices, technology, taxes and subsidies, prices of other goods, producer expectations, number of sellers.

Question 22

What happens to supply when production taxes decrease?

Answer 22

Supply increases (movement of curve to the right).

Question 23

What happens to supply when wages for production workers increase?

Answer 23

Supply decreases (movement of curve to the left).

Question 24

What is equilibrium price?

Answer 24

The price where the intentions of buyers and sellers match.

Question 25

What is equilibrium quantity?

Answer 25

The quantity demanded equals quantity supplied at the equilibrium price.

Question 26

What is the rationing function of prices?

Answer 26

The ability of supply and demand to establish a price at which selling and buying decisions are consistent.

Question 27

What is productive efficiency?

Answer 27

The production of any particular good in the least costly way.

Question 28

What is allocative efficiency?

Answer 28

The production of a particular mix of goods most highly valued by society.

Question 29

What happens to the equilibrium price and quantity of toothpaste if the price of toothbrushes decreases?

Answer 29

Equilibrium price increases and quantity increases.

Question 30

What happens to the equilibrium price and quantity of cars if consumer income falls?

Answer 30

Equilibrium price decreases and quantity decreases.

Question 31

What happens to the equilibrium price and quantity of bread if the price of baking ingredients decreases?

Answer 31

Equilibrium price decreases and quantity increases.

Question 32

What happens to equilibrium price and quantity of bread when the price of ingredients for baking bread decreases?

Answer 32

Increase in supply ## Footnote This leads to a lower equilibrium price and higher equilibrium quantity.

Question 33

What happens to equilibrium price and quantity of plastic toys when the price of plastic increases?

Answer 33

Decrease in supply ## Footnote This results in a higher equilibrium price and lower equilibrium quantity.

Question 34

What is the impact on equilibrium price and quantity of shoes when the price of leather increases and consumer income increases?

Answer 34

Decrease in supply = Increase in demand ## Footnote Price increases, but quantity is uncertain.

Question 35

What is consumer surplus?

Answer 35

The difference between the maximum price a consumer is willing to pay and the actual price ## Footnote It reflects the additional utility consumers gain from a purchase.

Question 36

What is producer surplus?

Answer 36

The difference between the actual price a producer receives and the minimum acceptable price ## Footnote Producers typically accept lower prices to sell their products.

Question 37

How are consumer surplus and prices related?

Answer 37

Inversely related ## Footnote As prices increase, consumer surplus decreases.

Question 38

How are producer surplus and prices related?

Answer 38

Positively related ## Footnote As prices increase, producer surplus increases.

Question 39

What are efficiency losses?

Answer 39

Reductions of combined consumer surplus and producer surplus due to underproduction or overproduction ## Footnote They occur when quantities deviate from the efficient quantity.

Question 40

What is a price ceiling?

Answer 40

A government-imposed limit on how high a price can be charged for a product ## Footnote It can lead to shortages.

Question 41

What is a price floor?

Answer 41

A government-imposed minimum price for a product ## Footnote It can lead to surpluses.

Question 42

What is the goal of rent controls?

Answer 42

To protect low-income families from escalating rents ## Footnote However, they can distort market signals.

Question 43

What happens when rental car companies close down in relation to used vehicle prices?

Answer 43

Used vehicle prices may increase ## Footnote More demand for second-hand cars leads to higher prices.

Question 44

Define 'demand'.

Answer 44

The willingness and ability of consumers to purchase goods at different prices.

Question 45

What does the law of demand state?

Answer 45

As the price of a good decreases, the quantity demanded increases, and vice versa.

Question 46

What is diminishing marginal utility?

Answer 46

The decrease in added satisfaction from consuming additional units of a good.

Question 47

What is a demand curve?

Answer 47

A graphical representation of the relationship between price and quantity demanded.

Question 48

What are normal goods?

Answer 48

Goods for which demand increases as consumer income increases.

Question 49

What are inferior goods?

Answer 49

Goods for which demand decreases as consumer income increases.

Question 50

What is a substitute good?

Answer 50

A good that can replace another in consumption.

Question 51

What is a complementary good?

Answer 51

A good that is consumed together with another good.

Question 52

What does 'change in demand' refer to?

Answer 52

A shift in the demand curve due to factors other than price.

Question 53

What does 'change in quantity demanded' refer to?

Answer 53

A movement along the demand curve due to a price change.

Question 54

Define 'supply'.

Answer 54

The willingness and ability of producers to offer goods for sale at different prices.

Question 55

What is the law of supply?

Answer 55

As the price of a good increases, the quantity supplied increases, and vice versa.

Question 56

What is a supply curve?

Answer 56

A graphical representation of the relationship between price and quantity supplied.

Question 57

What are determinants of supply?

Answer 57

Factors that cause the supply curve to shift, such as production costs and technology.

Question 58

What does 'change in supply' refer to?

Answer 58

A shift in the supply curve due to factors other than price.

Question 59

What does 'change in quantity supplied' refer to?

Answer 59

A movement along the supply curve due to a price change.

Question 60

Define 'equilibrium price'.

Answer 60

The price at which quantity supplied equals quantity demanded.

Question 61

Define 'equilibrium quantity'.

Answer 61

The quantity at which quantity supplied equals quantity demanded.

Question 62

What is a surplus?

Answer 62

A situation where quantity supplied exceeds quantity demanded.

Question 63

What is a shortage?

Answer 63

A situation where quantity demanded exceeds quantity supplied.