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Economics 201 Ch 3
Principles of Economics Ch 3
| Question | Answer |
|---|---|
| Demand | The willingness and ability of buyers to buy different quantities of a good at different prices. |
| Law of Demand | The price and the quantity demand of a good are inversely related. |
| Substitution Effect | A consumer will try to obtain as much consumer satisfaction as possible from that limited income. A consumer will substitute lower-priced goods for higher-priced goods. |
| Income Effect | When the price of good decreases, a consumer's income has greater buying power, allowing the consumer to buy a greater quantity of the good. When the price of a good increases, a consumer's income has less buying power allowing the consumer to buy a less. |
| The demand curve will have: | A negative slope because of the inverse (negative) relationship between price and quantity demanded. |
| The determinants of demand include: | Income (both normal and inferior), preferences, prices of related goods (substitutes or complements), number of buyers, and expectations of the future. |
| A change in demand refers to a shift in the demand curve. A shift to the _______ is an increase in demand and a shift to the ______ is a decrease in demand. | Right, left |
| Supply | The willingness and ability of sellers to sell different quantities of a good at different prices. |
| The Law of Supply | The price and quantity supplied of a good are directly related. |
| The determinant of supply is: | The cost of production. |
| An increase in the cost of production will cause a decrease in supply (supply curve shifts to the _______). A decrease in the cost of production will cause an increase in supply (supply curve shifts to the ______). | Left, right |
| The cost of producing a good can be changed by a number of common factors including: | The prices of labor and other inputs, technology, and taxes. |
| Technological Advance | The ability to produce more output per resource. It decreases the cost of production and increase supply. |
| Free Market | A market in which price is free to adjust up or down in response to demand and supply. |
| Equilibrium Price | The price where quantity demanded equals quantity supplied. |
| Surplus | When the market price is above the equilibrium price, the quantity supplied will exceed the quantity demanded. |
| Shortage | When the market price is below the equilibrium price, the quantity demanded will exceed the quantity supplied. |
| Price Ceiling | A maximum legal price. |
| A per ice ceiling leads to: | Fewer exchanges than at equilibrium, the use of non price rationing devices, and illegal transactions at prices above the ceiling. |
| Price Floor | A minimum legal price. |
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