A market:
1. reflects upsloping demand and downsloping supply curves.
2. entails the exchange of goods, but not services.
3. is an institution that brings together buyers and sellers.
4. always requires face-to-face contact between buyer and seller.
answer
is an institution that brings together buyers and sellers
question
The law of demand states that, other things equal:
1. price and quantity demanded are inversely related.
2. the larger the number of buyers in a market, the lower will be product price.
3. price and quantity demanded are directly related.
4. consumers will buy more of a product at high prices than at low prices.
answer
price and quantity demanded are inversely related
question
When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes the:
1. cost effect.
2. inflationary effect.
3. income effect.
4. substitution effect.
answer
income effect
question
In presenting the idea of a demand curve, economists presume the most important variable in determining the quantity demanded is:
1. the price of the product itself.
2. consumer income.
3. the prices of related goods.
4. consumer tastes.
answer
the price of the product itself
question
In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by:
1. an increase in the cost of making donuts.
2. an increase in the price of coffee.
3. consumers expecting donut prices to fall.
4. a change in buyer tastes.
answer
a change in buyer tastes
question
Which of the following would not shift the demand curve for beef?:
1. a widely publicized study that indicates beef increases one's cholesterol
2. a reduction in the price of cattle feed
3. an effective advertising campaign by pork producers
4. a change in the incomes of beef consumers
answer
a reduction in the price of cattle feed
question
An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that:
1. there are many goods that are substitutes for bicycles.
2. there are many goods that are complementary to bicycles.
3. there are few goods that are substitutes for bicycles.
4. bicycles are normal goods.
answer
bicycles are normal goods
question
If the demand curve for product B shifts to the right as the price of product A declines, then:
1. both A and B are inferior goods.
2. A is a superior good and B is an inferior good.
3. A is an inferior good and B is a superior good.
4. A and B are complementary goods.
answer
A and B are complementary goods
question
College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are:
1. inferior goods.
2. normal goods.
3. complementary goods.
4. substitute goods.
answer
inferior goods
question
"In the corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand." In which of these two statements are the terms demand and supply being used correctly?
1. in neither statement.
2. in the second statement.
3. in the first statement.
4. in both statements.
answer
in the second statement
question
Other things equal, if the price of a key resource used to produce product X falls, the:
1. product supply curve of X will shift to the right.
2. product demand curve of X will shift to the right.
3. product supply curve of X will shift to the left.
4. product supply curve of X will not shift.
answer
product supply curve of X will shift to the right
question
Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect:
1. the supply of ethanol, a corn-based product, to increase.
2. consumer demand for wheat to fall.
3. the supply to increase as farmers plant more corn.
4. the supply to fall as farmers plant more of other crops.
answer
the supply to increase as farmers plant more corn
question
The rationing function of prices refers to the:
1. tendency of supply and demand to shift in opposite directions.
2. fact that ration coupons are needed to alleviate wartime shortages of goods.
3. capacity of a competitive market to equate quantity demanded and quantity supplied.
4. ability of the market system to generate an equitable distribution of income.
answer
capacity of a competitive market to equate quantity demanded and quantity supplied
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. An increase in income, if X is a normal good, will:
1. increase D, increase P, and increase Q.
2. increase D, increase P, and decrease Q.
3. increase S, increase P, and increase Q.
4. decrease D, increase P, and increase Q.
answer
increase D, increase P, and increase Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. An increase in the price of a product that is a close substitute for X will:
1. decrease D, increase P, and decrease Q.
2. increase D, increase P, and decrease Q.
3. increase D, increase P, and increase Q.
4. increase D, decrease P, and increase Q.
answer
increase D, increase P, and increase Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. An increase in the prices of resources used to produce X will:
1. increase S, increase P, and increase Q.
2. increase D, increase P, and increase Q.
3. decrease S, decrease P, and decrease Q.
4. decrease S, increase P, and decrease Q.
answer
decrease S, increase P, and decrease Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. A reduction in the number of firms producing X will:
1. increase D, increase P, and increase Q.
2. increase S, decrease P, and increase Q.
3. decrease S, increase P, and decrease Q.
4. decrease S, decrease P, and increase Q.
answer
decrease S, increase P, and decrease Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. An increase in the price of a product that is a complement to X will:
1. decrease S, decrease P, and decrease Q.
2. decrease D, decrease P, and decrease Q.
3. increase D, increase P, and increase Q.
4. increase D, increase P, and decrease Q.
answer
decrease D, decrease P, and decrease Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. If X is an inferior good, a decrease in income will:
1. decrease D, decrease P, and decrease Q.
2. decrease D, decrease P, and increase Q.
3. increase S, decrease P, and increase Q.
4. increase D, increase P, and increase Q.
answer
increase D, increase P, and increase Q
question
Other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.
Refer to the above. Consumer expectations that the price of X will rise sharply in the future will:
1. increase S, increase P, and increase Q.
2. increase D, increase P, and increase Q.
3. decrease S, increase P, and increase Q.
4. increase D, decrease P, and increase Q.
answer
increase D, increase P, and increase Q
question
If an effective ceiling price is placed on hamburgers then:
1. the quantity demanded will exceed the quantity supplied.
2. a black market for hamburger may evolve.
3. consumers may want government to ration hamburger.
4. All of these are likely outcomes.
answer
all of these are likely outcomes
question
If a legal ceiling price is set above the equilibrium price:
1. a shortage of the product will occur.
2. a surplus of the product will occur.
3. a black market will evolve.
4. neither the equilibrium price nor equilibrium quantity will be affected.
answer
neither the equilibrium price nor equilibrium quantity will be affected
question
Markets
answer
institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods, services or resources
types: local, national, international
question
Demand
answer
schedule or curve that shows the various amounts of a product/resource that CONSUMERS are willing and able to purchase at each price in a set of possible prices during specified period of time, all else equal
1. individual demand
2. market demand
3. consumer MUST be willing and able
question
Law of Demand
answer
other things equal:
1. as price drops, the quantity demanded increases
2. as prices rise, the quantity demanded drops
question
Law of Diminishing Marginal Utility
answer
less satisfaction is derived for each additional product consumed (the more you get of something, the less satisfaction each provides)
because satisfaction is lowered (marginal utility drops), consumers only continue to buy if price of units is progressively reduced
question
Income Effect
answer
lower price increase purchasing power of a buyer's $$ income, allows them to purchase more of product than before; "as if" they have a larger income when prices drop (higher price has opposite effect)
question
Substitutional Effect
answer
at lower price, buyers substitute what's now a less expensive product with other products that are slightly more expensive, fallen price now "better deal" than others; "now"
question
Demand Curve
answer
1. quantity demanded: x-axis, price: y-axis
inverse relationship between price and quantity demanded, shown through curve
2. downward slope reflects law of demand: people buy more of product/resource as price falls
question
Market Demand
answer
sum up quantities that each demands
question
Change in Quantity Demanded
answer
occurs when price of product changes
-uses same demand schedule
-moves along same demand curve
question
Change in Demand
answer
occurs when one/more of "determinants of demand," (other than product price) changes
*new demand schedule
*shift to new demand curve
*shift to the left (decrease in demand) or to the right (increase in demand)
question
Determinants of Demand
answer
factors that affect purchases:
1. change in taste and preferences (increase in taste & demand)
2. change in # of buyers (increase buyers & demand)
3. change in income:
-normal goods (increase income, increase demand)
-inferior goods (increase income, decrease demand)
4. change in price of related good (complement) (increase in jelly price, decrease in peanut butter demand)
5. change in price of related goods (substitute) (increase in pepsi price, increase in coke demand)
6. change in consumer's expectations
-future prices (increase price expectation, demand for more increases)
-future income (income expectation increase, demand for products increases)
question
Normal Good
answer
"superior good;" products whose demand varies directly with money income
question
Inferior Good
answer
goods whose demand varies inversely with money income
question
Complementary Good
answer
good that is used together with another good (e.g. PB&J, usually used with one another)
question
Substitute Good
answer
good that can be used in place of another good (e.g. Coke v. Pepsi)
question
Supply
answer
schedule or curve showing various amounts of a product/resource that PRODUCERS are willing and able to produce to make available for sale at each price in a set of possible prices during a specified period in time, all else equal
*PRICE and SUPPLY are most important
question
Law of Supply
answer
all things equal:
*as the price increases, quantity supplied increases
*as the price decreases, quantity supplied decrease
question
Determinants of Supply
answer
1. change in resource prices (increase in price of labor, decrease in supply)
2. change in technology (increase in technology, increase in supply)
3. change in # of sellers (increase in # sellers, increase in supply)
4. a. change in taxes (business taxes): (increase in taxes, decrease in supply)
b. change in subsidies (gov't granting, not taking): (increase in subsidies, increase in supply
5. change in prices of "other good" (other things you could supply w/ same resources): (increase in prices of wheat, decrease in supply of corn)
*increase in total revenue=increase in price x quantity
*total revenue-total cost= increase in profit
6. change in producer expectations (expect prices to increase, decrease in supply)
question
Change in Supply
answer
change in schedule, shift of curve: change in one or more determinants of supply
*shift to left (decrease in supply) or shift to right (increase in supply)
question
Change in Quantity Supplied
answer
movement from one point to another on fixed supply curve; caused by change in price of specific product being considered
question
Market Equilibrium
answer
buyers and sellers interact to determine the market price and quantity
question
Equilibrium Price
answer
price at which Qd=Qs (quantity demanded=quantity supplied); price at which the market "clears"
1. occurs where demand and supply curves intersect
2. intentions of buyers and sellers match
question
Equilibrium Quantity
answer
quantity at which intention of buyers and sellers match
*quantity demanded (Qd)=quantity supplied (Qs)
question
Surplus
answer
excess supply; price is reduced/driven down by suppliers until its gone;incentive to produce corn declines and incentive to buy corn increases (above equilibrium) Qs>Qd
question
Shortage
answer
excess demand; demanders are willing to buy more at "higher price" because cost is low; competition among buyers will drive up price, and will continue unless disrupted by changes of supply or demand (below equilibrium) Qd>Qs
question
Rationing Function of Prices
answer
ability of competitive markets to establish a price at which the intentions of the buyers and sellers are consistent
question
Productive Efficiency
answer
production of any particular good in the least costly way
question
Allocative Efficiency
answer
particular mix of goods and services most highly valued by society (minimum-cost production assumed)
question
Changes in Supply, Demand & Equilibrium
answer
Increase in Demand: price increases, quantity increases
Decrease in Demand : price decreases, quantity decreases
Increase in Supply: price decreases, quantity increases
Decrease in Supply: price increases, quantity decreases
maximum legal price a seller may charge for product (set below market equilibrium)
*purpose: enable consumers to obtain "essential" product at affordable rate
*result: persistent SHORTAGE, black markets (only extreme cases), disrupts market's ability to distribute the product
e.g. rent controls, usury laws, gasoline
question
Price Floor
answer
minimum legal price fixed by government (set above market equilibrium); price at or above price floor is legal, price below it is not
*purpose: provide sufficient income to the supplier
*result: persistent SURPLUS, gov't may restrict supply, gov't must purchase surplus (at taxpayer's expense)
e.g. agricultural products,minimum wage
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