Flashcards › Economics Ch 7: Supply & Demand

Deciding what to buy and at what price is called _____? Demand Deciding how much to sell and at what price is called _____? Supply If supply is up, but demand is down, what will happen to price? The price will decrease If supply is down, but demand is up, what will happen to price? The price will increase What are the 4 basic ways to define a market? Geography, demographics, product and price What is a marketplace? A marketplace is where the goods and services of a market are sold What is a market? A place, real or virtual, where goods and services are freely bought and sold What is the principle of voluntary exchange? A buyer and seller exercise their economic freedom by agreeing on the price, quantity and quality of goods and services to be bought and sold What must legally occur for voluntary exchange to occur? A "meeting of the minds," meaning that the buyer and seller agree to price, quantity and quality of goods and services to be bought and sold What is the buyer's problem regarding voluntary exchange? Deciding how much to pay for a certain quality and quantity of goods and services What is the seller's problem regarding voluntary exchange? Deciding what price to sell a certain quality and quantity of goods and services What does the "law of demand" explain? How people react to changing prices regarding the quantities of goods or services What type of relationship exists between quantity demanded and price? An inverse relationship: as price increases, demand will decrease; as price decreases, demand will increase What factors explain the inverse relationship between price and the quantity demanded? real income, possible substitutes (alternatives or choices), and dminishing marginal utility What is the real income effect? As prices increase (or decrease) the consumer will not be able to buy the same quantity because the consumer's income does not match the increase (or decrease) in price In terms of real income effect. what will happen if the price of gasoline increases by $1.00 per gallon? The consumer will not be able to buy as much with the same level of income; real income decreases In terms of real income effect. what will happen if the price of gasoline decreases by $1.00 per gallon? The consumer will be able to buy more with the same level of income; real income increases What is another name for real income? purchasing power Considering what was taught in previous lessons, what two things can affect real income (purchasing power)? Inflation and deflation What is the substitution effect? The idea that choices between goods or services that are similar in quantity, quality and purpose will be purchased based on best available price What is utility? The power (ability) of a good or service to satisfy a need or want What is marginal utility? The idea that the consumer's total satisfaction with a good or service will increase with each additional purchase What is the "law of diminishing marginal utility"? The idea that at some point the additional satisfcation with a good or service will decrease with each additional unit purchased If a consumer's grocery purchases are limited to a budget of $100 per week, what will happen if groceries suddenly increase in cost by 5%? The consumer's purchasing power (real income) will decrease by 5% A "demand schedule" demonstrates _____? The relationship between price and demand; showing an inverse relationship between price and demand What does a "demand curve" demonstrate? The quantity of a good or service demanded at each possible price Why is a demand curve used? To help determine the best possible price for a good or service in relaytionship to available quantity (supply) What is the difference between a shortage and scarcity? A shortage is a temporary drop in supply; scarcity is the idea that there will always be limits on what a consumer can purchase due to limited income What 5 things are considered "derterminants of demand"? Population Change, Income Change, Preference Change, Available Substitution and Complementary Goods What increases if there is an increase in the population within a geographic marketplace? The opportunity for buying and selling goods and services increases What decreases if there is a decrease in the population within a geographic marketplace? The opportunity for buying and selling goods and services decreases What happens if consumer income increases? The demand for goods and services increases What happens if consumer income decreases? The demand for goods and services decreases What happens when a particular good or service increases in popularity? The demand for that good or service increases What happens when a particular good or service decreases in popularity? The demand for that good or service decreases If there are 5 brands of coffee sold at a grocery store, and one brand decreases its price to 25% less than all the other brands? Substitution effect What are complementary goods? Goods that are generally bought together, or bought after another purchase for supplies or function Give an example of complementary goods if you just bought a new MP3 player. Buying music to download to the MP3 player What is elasticity? The responsiveness of consumers to changes in the price of a good or service; the consumer decision to buy or not to buy What does the price elasticity of demand measure? The responsiveness of consumers to changes in the price of a good or service What determines the elastic demand of a good or service? The increase or decrease in price of a good or service in comparison to other brands (substitutes) What type of goods might have inelastic demand? Grocery staples, medicines, necessities What makes a good or service experience inelastic demand? Consumer inflexibility toward price increases or decreases What 3 factors determine elasticity of demand? substitution, consumer budget and consumer adjustment to price changes What is the "law of supply"? The idea that as the price of a good or service increases, so does the quantity supplied (available) Why does the quantity supplied generally increase when the price of a good or service increases? The sellers see an opprtunity to increase sales at a higher price and profit Why does the quantity supplied generally decrease when the price of a good or service decreases? The seller perceives a decreased opportunity for sales and profit What is a profit incentive? The idea that an increased opportunity for more profit will increase exchange; and a decreased opportunity for profit will decrease exchange What does a "supply schedule" demonstrate? As prices increase so does the supply offered by producers What does a "supply curve" measure? The relationship between price and supply What are the 4 determinants of supply? Price of Inputs, Number of Competing Industry Producers (Firms), Taxes and Technology What happens to supply when taxes on a good or service increase? Supply tends to decrease What happens to price when supply can come from a number of competing industry producers? Competition decreases price and increases consumer purchasing power (real income) What happens to supply if the "price of inputs" increases? The cost of supply increases and the consumer price for the finished good or service increases What is included in the "price of inputs"? raw materials, wages, utility services cost, etc. In terms of supply, what is technology? The science and engineering that increases production and distribution of goods and services while decreasing costs of production What does the "law of diminishing returns" explain? The relationship between increasing units of one factor of production (inputs) to a particular level will result in decreased returns (outputs) What is the "equilibrium price"? The point where price, supply and demand meet What is a surplus and how does it affect price? A surplus is an excess amount of a good or service in the marketplace that forces prices down What is a shortage and how does it affect price? A shortage is a decreased amount of a good or service in the marketplace that forces prices up What are market forces and how do they affect supply and demand? Market forces are the effects of increases and decreases of supply, demand and changes in prices that cause the market to seek a balance or equilibrium; the overall effect is to adjust supply to demand through pricing What is a "price ceiling"? A government set maximum price that can be charged for a good or service What is a "price floor"? A government set minimum price that can be charged for a good or service Give an example of a "price floor." Minimum wage laws Give an example of a "price ceiling." Rent control in major urban areas used to control housing costs What is rationing? The distribution of goods and services on criteria other than price Give an example of rationing that has occurred in the US. During 1973 there was a gasoline shortage and the government limited how much and when a consumer could buy gasoline What is a black market? An illegal, often "underground," market for goods that are either in short supply (but high demand) or are illegal to sell; prices in the black market are usually elevated 100-1000 percent Give an example of a black market. Drug sales & distribution; working "under the table" so no taxes are paid What black market product gave rise to organized crime in the 1920s? The sale of alcoholic beverages during Prohibition

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