Transcript Chapter 3 Review

Chapter 3 Review
Supply & Demand
What is a market:
• -an institution that brings together buyers and
sellers.
Markets:
• -assume many buyers and many sellers of a
standardized product.
The law of demand:
• -price and quantity demanded are inversely
related.
The demand curve shows the
relationship between:
• -price and quantity demanded.
Economists use the term demand to
refer to:
• -schedule of various combinations of market
prices and amounts demanded.
- The relationship between quantity
supplied and price is _____ and the
relationship between quantity
demanded and price is _____.
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• direct, inverse
What is the income effect?
• -when the price of a product increases, a
consumer is able to buy less of it with a given
money income.
A demand curve:
• -indicates the quantity demanded at each
price in a series of prices.
The most important variable in determining the
quantity demanded/supplied is:
• PRICE
Substitution Effect
• an increase in the price of a product will
reduce the amount of it purchased because:
consumers will substitute other products for
the one whose price has risen
• Eg. Coke → Pepsi
The income and substitution effects
account for
• the downward sloping demand curve
Complementary Goods
• goods that are used together with another
good
• hot dog buns with hot dogs
Determinants of Demand
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Tastes
Number of buyers
Income- normal v. inferior goods
(Independent goods)
Prices of related goods
Consumer expectations
Substitute goods
Complementary goods
Change in DEMAND versus change in
QUANTITY DEMANDED
The law of supply
• producers will offer more of a product at high
prices than they will at low prices
The supply curve shows the
relationship between
• price and quantity supplied
Determinants of Supply
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Change in resource prices
Change in technology
Change in prices of other goods
Change in producer expectations
Change in the number of suppliers
Price Floor
• Rationale
• Impact
• result
Price Ceiling
• Rationale
• Impact
• result