Review 2 Supply, Demand, and the Market Process

Question 1

Effect of a price floor

Answer 1

surpluses

Question 2

Effect of an increase in demand on price and quantity

Answer 2

both increase

Question 3

producer surplus

Answer 3

The difference between the price that suppliers actually receive and the minimum price they would be willing to accept. It measures the net gains to producers and resource suppliers from market exchange. It is not the same as profit.

Question 4

draw a supply curve

Answer 4

Question 5

derived demand

Answer 5

The demand for a resource; it stems from the demand of the final good the resource helps produce.

Question 6

draw a demand curve

Answer 6

Question 7

market

Answer 7

An abstract concept encompassing the forces of demand and supply and the interaction of buyers and seller with potential for exchange to occur.

Question 8

Effect of an increase in supply on price and quantity

Answer 8

price decreases, quantity increases

Question 9

Substitutes

Answer 9

Products that serve similar purposes. An increase in the price of one will cause an increase in demand for the other (examples are hamburgers and tacos, butter and margarine, Chevrolets and Fords).

Question 10

profit

Answer 10

An excess of sales revenue relative to the opportunity cost of production. The cost component includes the opportunity cost of all resources, including those owned by the firm. Therefore, profit accrues only when the value of the good produced is greater than the value of the resources used for its production.

Question 11

invisible hand principle

Answer 11

The tendency of market prices to direct individuals pursuing their own interests to engage in activities promoting the economic well-being of society.

Question 12

Price floor

Answer 12

a legally established minimum price buyers must pay for a good or resource.

Question 13

Effect of an decrease in demand on price and quantity

Answer 13

both decrease

Question 14

Who determines the lowest possible price of any voluntary exchange?

Answer 14

the seller

Question 15

What are some factors that would tend to increase the supply of a good.

Answer 15

A decrease in the cost of producing the good
An increase in the number of sellers
An improvement in the technology to produce the good
Seller expect a lower price in the future

Question 16

supply comes from

Answer 16

sellers

Question 17

Law of supply

Answer 17

A principle that states there is a direct relationship between the price of a good and the quantity of it producers are willing to supply. As the price of a good increases, producers will wish to supply more of it. As the price decreases, producers will wish to supply less.

Question 18

What are some factors that would increase the price of a good

Answer 18

increased production cost
increase in the price of a substitute
decrease in the price of a complement
increase in the number of buyers
increase in the income of buyers for a normal good
decrease in the income of buyers for an inferior good
consumers begin to expect higher prices in the future
sellers begin to expect higher prices in the future

Question 19

normal good

Answer 19

A good that has a positive income elasticity, so that as consumer income rises, demand for the good rises, too.

Question 20

Price ceiling

Answer 20

A legally established maximum price sellers can charge for a good or resource.

Question 21

What are the 3 questions of economics

Answer 21

what to produce, how to produce it, and who to produce it for

Question 22

consumer surplus

Answer 22

The difference between the maximum price consumers are willing to pay and the price they actually pay. It is the net gain derived by the buyers of a good.

Question 23

What are some factors that will cause an increase in demand?

Answer 23

the price of a complementary good decreases
the price of a substitute good increases
number of buyers increases
income of buyers increases for a normal good
income of buyers decreases for an inferior good
speculation on higher prices in the future

Question 24

another name for excess supply

Answer 24

surplus

Question 25

Law of diminishing marginal utility

Answer 25

The basic economic principle that as the consumption of a product increases, the marginal utility derived from consuming more of it (per unit of time) will eventually decline.

Question 26

Assume that the price of oil is $5. If the equilibrium price of oil is $10, then there is a ______________ of oil.

Answer 26

shortage

Question 27

demand comes from

Answer 27

buyers

Question 28

Law of demand

Answer 28

A principle that states there is an inverse relationship between the price of a good and the quantity of it buyers are willing to purchase. As the price of the good increases, consumers will wish to purchase less of it. As the price decreases, consumers will wish to purchase more of it.

Question 29

complements

Answer 29

Products that are usually consumed jointly (for example bread and butter, hot dogs and hot dog buns). A decrease in the price of one will cause an increase in demand for the other.

Question 30

Loss

Answer 30

A deficit of sales revenue relative to the opportunity cost of production. Losses are a penalty imposed on those who produce goods even though they are valued less than the resources required for their production.

Question 31

Effect of an decrease in supply on price and quantity

Answer 31

price increases, quantity decreases

Question 32

Who determines the highest possible price of any voluntary exchange?

Answer 32

the buyer

Question 33

Inferior goods

Answer 33

A good that has a negative income elasticity, so that as consumer income rises, the demand for the good falls.

Question 34

If the total utility of have one unit of a good is 20 utils and the total utility of having two units of the same good is 25 utils, what is the marginal utility of the second unit of that good?

Answer 34

5 utils (25-20)

Question 35

excess demand causes prices to

Answer 35

increase

Question 36

entrepreneur

Answer 36

A person who introduces new products or improved technologies and decides which project to undertake. A successful entrepreneur's actions will increase the value of resources and expand the size of the economic pie.

Question 37

another name for excess demand

Answer 37

shortage

Question 38

Demand and supply are determined by

Answer 38

something other than price

Question 39

marginal utility

Answer 39

The additional utility, or satisfaction, derived from consuming an additional unit of a good.

Question 40

Quantity demanded and quantity supplied are determined by

Answer 40

price

Question 41

excess supply causes prices to

Answer 41

decrease

Question 42

Assume that the price of oil is $20. If the equilibrium price of oil is $10, then there is a ______________ of oil.

Answer 42

surplus

Question 43

Effect of price ceiling

Answer 43

shortages

Question 44

equilibrium

Answer 44

A state in which the conflicting forces of demand and supply are in balance. When a market is in equilibrium, the decisions of consumers and produces are brought into harmony with one another, the quantity demanded will equal the quantity supplied.