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

_____.

• 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

• 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

• 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