Chapter 3 Supply and Demand Models

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The law of demand

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Macroeconomics (Econ 201) ch. 3 supply and demand models study sheet for the midterm

39 Terms

1

The law of demand

Inverse relationship between the price of a product and the amount of the product that consumers are willing and able to purchase, holding other things constant

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2

Income Effect

the change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes

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3

Substitution Effect

The change in the quantity demanded of a good that results from the effect of a change in the good’s price on a consumers’ purchasing power

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4

Ceteris Paribus

 Holding other things constant, the requirement that when analyzing a relationship between two variable other variables must be held constant

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5

Demand curve shifts

cause by a change in something other than price

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6

normal goods

goods for which the demand increases as income rises and decreases as income falls

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7

normal goods examples

clothing, restaurant meals, vacations

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8

inferior goods

goods for which the demand increases as income falls and decreases as income rises

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9

inferior goods examples

second hand clothing and ramen noodles

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10

substitutes

goods and services that can be used for the same purpose

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11

substitutes example

The Big Mac & the Whopper

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12

an increase in price of a product with a substitute causes

an increase in demand for the substitute

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13

a decrease in price of a product with a substitute causes

a decrease in demand for the substitute

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14

complements

goods and services that are used together

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15

complements examples

Big Mac & McDonald’s Fries

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16

An increase in price of a product with a complement would cause

a decrease in demand for its complement

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17

A decrease in price of a product with a complement would cause

an increase in demand for its complement

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18

Change in expected future price

act as substitutes for current products

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19

an expected increase in price tomorrow

increases demand today

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20

an expected decrease in price tomorrow

decreases demand today

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21

supply curve shifts

refers to a change in the quantity supplied at every price point.

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22

inputs

things used in the production of a good or service

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23

increase in price of input

decreases profitability of good and causes decrease in supply

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24

decrease in price of input

increases profitability of good and causes increase in supply

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25

more firms in the market will result in

more product available at given price and an increase in supply

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26

less firms in the market will result in

less product available at given price and a decrease in supply

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27

If firm anticipates that the price of its product will be higher in the future they may

decrease its supply today in order to increase supply in the future

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28

If firm anticipates that the price of its product will be lower in the future they may

increase supply today in order to decrease supply in the future

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29

Change in quantity supplied

a change in the price of the product being examined causes a movement along the supply curve

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30

change in supply

any change besides price of product affecting supply causes the entire supply curve to shift

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31

Market equilibrium

a situation in which quantity demanded equals quantity supplied

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32

Equilibrium price

price at which quantity demanded equals quantity supplied

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33

equilibrium quantity

quantity bought and sold at the equilibrium price

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34

surplus

a situation in which quantity supplied is greater than quantity demanded

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35

surplus prediction

sellers will compete amongst themselves, driving price down

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36

shortage

a situation in which quantity demanded is greater than quantity supplied

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37

prediction

sellers will realize they can increase the price and still sell as much, so the price will rise

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38

Simultaneous Shifts

Both the demand and supply curves shift at the same time

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39

Simultaneous Shifts example

An increase in consumer income and a decrease in the price of a complementary good lead to a rise in demand for both goods.

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