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Chapter 3 – Demand and Supply
Read pages 60 - 80
I Basics of Demand
A) Terminology
1) The quantity demanded of a good or service is
the quantity buyers are willing and able to buy
at a particular price during a particular period,
all other things unchanged.
2) The demand schedule is a table that shows the
quantities of good or service demanded at
different prices during a particular period, all
other things unchanged.
3) A demand curve is a graphical
representation of a demand schedule.
4) A movement along a demand curve that
results from a change in price is called a
change in the quantity demanded.
5) The law of demand holds that for virtually
all goods and services, a higher price
induces a reduction in quantity demanded
and a lower price induces an increase in
quantity demanded.
B) Changes in Demand
1) A shift in a demand curve is called a change in
demand.
2) A variable that can change the quantity of a
good or service demanded at each price is
called a demand shifter.
3) Types of demand shifters
a) Consumer preferences
b) Prices of related goods and services
c) Income
d) Demographic characteristics
e) Buyer expectations.
4) If a reduction (an increase) in the price of one
good increases (reduces) the demand for another,
the two goods are called complements.
5) If a reduction (an increase) in the price of one
good reduces (increases) the demand for another,
the two goods are called substitutes.
6) A good for which demand increases when
income increases is called a normal good.
7) A good for which demand decreases when
income increases is called an inferior good.
II Basics of Supply
A) Terminology
1) The quantity supplied of a good or service
is the quantity sellers are willing to sell at
a particular price during a particular
period, all other things unchanged.
2) The supply schedule is a table that shows
the quantities supplied at different prices
during a particular period, all other things
unchanged.
3) A supply curve is a graphical representation of a
supply schedule. It shows the relationship
between price and quantity supplied during a
particular period, all other things unchanged.
4) A movement along a supply curve that results
from a change in price is called a change in the
quantity supplied.
5) There is no law of supply as there is a law of
demand. Supply curves can have a negative
slope.
B) Changes in supply
1) A shift in a supply curve is called a change in supply.
2) A variable that can change the quantity of a good or service
supplied at each price is called a supply shifter.
3) Types of supply shifters.
a) Prices of factors of production.
b) Returns to alternative activities.
c) Technology.
d) Seller expectations.
e) Natural events.
f) The number of sellers.
III Demand, Supply and Equilibrium
A) Terminology
1) The model of demand and supply uses the
demand and supply curves to explain the
determination of price and quantity in a
market.
2) The equilibrium price in any market is the
price at which quantity demanded equals
quantity supplied.
3) The equilibrium quantity is the quantity
demanded and supplied at the equilibrium
prices.
4) A surplus is the amount by which the
quantity supplied exceeds the quantity
demanded at the current price.
5) A shortage is the amount by which the
quantity demanded exceeds the quantity
supplied at the current price.
B) Some illustrations.
1) An increase in demand will raise the
equilibrium price and quantity.
2) A decrease in demand will reduce the
equilibrium price and quantity.
3) An increase in supply will reduce the
equilibrium price and increase the
equilibrium quantity.
4) A decrease in supply will increase the
equilibrium price and decrease the
equilibrium quantity.
5) Simultaneous changes in supply and
demand can produce uncertain changes in
either the price or the quantity. For
example, a simultaneous decreases in
supply and demand will reduce the
equilibrium quantity but may increase,
decrease or do nothing to the equilibrium
price.
IV The Circular Flow Model
A) Terminology
1) The circular flow model provides an overview
of how markets work and how they are related
to each other. It shows flows of spending and
income through the economy.
2) It shows that goods and services that
households demand are supplied by firms in
the product markets.
3) It shows that goods and services that firms
demand are supplied by households in the
factor markets.
V Sample Questions
1) The Law of demand asserts that
a) everything has its price.
b) there is no such thing as a free lunch.
c) all resources are scarce.
d) there is a negative relationship between
the amount of something that people will
purchase and the sacrifice they must make
to obtain it.
d) is correct.
2) Which of the following will not cause a
shift in the demand curve for Coca-Cola?
a) A change in the price of a close substitute,
Pepsi.
b) A highly successful Coca-Cola
commercial aired on television during the
Super Bowl.
c) A decrease in consume incomes.
d) A decrease in the price of Coca-Cola.
d) Is correct.
3) Which of the following is not a
characteristic of equilibrium in a market?
a) Quantity supplied equals quantity
demanded.
b) The demand curve and the supply curve
intersect.
c) No surplus or shortage exists.
d) Supply equals demand.
d) Is correct.
4) An increase in supply would cause demand
to
a) increase to meet the higher quantity
produced.
b) decrease since there is excess supply.
c) either increase or decrease, depending on
the degree of the supply curve shift.
d) neither increase nor decrease, but the
quantity demanded would increase.
d) Is correct.