Chapter 3 Market Demand and Supply

1. Chapter 3Market Demand and Supply • Key Concepts • Summary • Practice Quiz ©2004 Thomson/South-Western

2. What is thelaw of demand? The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus

3. What does “ceteris paribus” mean? All else remains the same

4. What is a demand curve? Depicts the relationship between price and quantity demanded

5. Individual’s Demand Curve for Compact Discs P A $20 B $15 C $10 D $5 Demand Curve Q 4 8 12 16

6. Why do demand curves have a negative slope? At a higher price consumers will buy fewer units, and at a lower price they will buy more units

7. What is ademand schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices

8. What ismarket demand? The summation of the individual demand schedules

9. IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND

10. When price changes, what happens? The curve does not shift - there is a change in the quantity demanded

11. Increase in Quantity Demanded Decrease in Price

12. P Fred’s Demand Curve $20 $15 $10 $5 D1 Q 1 2 3 4 5 6 7 8 9

13. P Mary’s Demand Curve $20 $15 $10 D2 $5 Q 1 2 3 4 5 6 7 8 9

15. P Market Demand Curve $20 $15 $10 D3 $5 Q 3 4 5 6 7 8 9 10 11 12

16. Market Demand Schedule for Compact Discs Price Fred Mary Total Demanded $25 1 + 0 = 1 $20 2 1 3 $15 3 3 6 $10 4 5 9 $5 5 7 12

17. P A change in price causes a change in the quantity demanded $20 A $15 B $10 D $5 Q 10 20 30 40 50

18. When something changes other than price, what happens? The whole curve shifts,there is a change in demand

19. P When the ceteris paribus assumption is relaxed, the whole curve can shift $20 A B $15 $10 D2 D1 $5 Q 10 20 30 40 50

20. Change in demand Change innonpricedeterminant

21. What can cause a shift in a demand curve? • Number of buyers in the market • Tastes and preferences • Income • Expectations of consumers • Prices of related goods

22. Decrease in quantity demanded Upward movement along the demand curve Price increases

23. Increase in quantity demanded Downward movement along the demand curve Price decreases

24. Decrease or increase in demand Leftward or rightward shift in the demand curve Nonprice determinant

25. What is a normal good? Any good for which there is a direct relationship between changes in income and its demand curve

26. What is aninferior good? Any good for which there is an inverse relationship between changes in income and its demand curve

27. What aresubstitute goods? Goods that compete with one another for consumer purchases

28. What happens when the price increases for a good that has a substitute? The demand curve for the substitute good increases

29. What happens when the price decreases for a good that has a substitute? The demand curve for the substitute good decreases

30. What does a direct relationship between price and quantity mean? The two move in the same direction

31. What are complementary goods? Goods that are jointly consumed with another good

32. What happens when the price increases for a good that has a complement? The demand curve for the substitute good decreases

33. What happens when the price decreases for a good that has a complement? The demand curve for the substitute good increases

34. What does an inverse relationship between price & quantity mean? It means that price and quantity move in opposite directions

35. What does a direct relationship between price & quantity mean? It means that price and quantity move in the same direction

36. What is thelaw of supply? The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus

37. Why do supply curves have a positive slope? Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity

38. P A company’s Supply Curve for Compact Discs SupplyCurve A $20 $15 B $10 C $5 Q 10 20 30 40

39. An Individual Seller’s Supply for Compact Discs Point Price Quantity A $20 40 B 10 30 C 6 20

40. P Super Sound Supply Curve S1 $25 $20 $15 $10 Q 10 15 20 25

41. P High Vibes Supply Curve S2 $25 $20 $15 $10 Q 20 25 30 35

42. What is a market? Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged

43. What is market supply? The horizontal summation of all the quantities supplied at various prices that might prevail in the market

44. P Market Supply Curve $25 $20 S total $15 $10 Q 40 45 55 60

45. Market Supply Schedule for Compact Discs Price Super Sound High Vibes Total $25 25 + 35 = 60 $20 20 30 50 $15 15 25 40 $10 10 20 30 $5 5 15 20

46. IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY

47. When price changes, what happens? The curve does not shift - there is a change in the quantity supplied

48. P A change in price causes a change in the quantity supplied SupplyCurve A $20 $15 B $10 C $5 Q 10 20 30 40

49. Increase in Quantity Supplied Increase in Price

50. When something changes other than price, what happens? The whole curve shifts - there is a change in supply