econ chapter 3 test

demand

demand

the quantities of a good or service that consumers are willing and able to purchase at various prices during a given period of time

desire, ability, willingness

three things that make-up demand

the law of demand

• High Prices = Low Demand

• Low Prices = High Demand

income effect

As the price of an item decreases, the consumer may spend saved income on more of that product

substitution effect

As the price of an item rises, consumers may substitute another comparable item that costs less

demand schedule

A listing of quantities that would be purchased at various prices.

demand curve

A graphic representation of a demand schedule which shows the quantity demanded at all prices

principle of diminishing marginal utility

• The Idea of Less and Less Extra Satisfaction

• As additional units of a product are consumed, the additional satisfaction gained from each unit becomes less and less

• When additional satisfaction gained is less than the price of an additional unit, demand for the product will cease.

change in demand

movement along the demand curve created by changing prices

change in level of demand

shown by a movement of the entire demand curve to the right or left. It signals that people are willing to buy more of the product at each and every price.

change in:

• consumer income

• consumer tastes

• price of substitutes

• price of complements

• population

• consumer expectations

determinants of demand

elasticity

the ratio of change in quantity demanded to the change in price

elastic demand

a large change in demand when price changes (Consumers are sensitive); represented by a gradual slope

inelastic demand

small change in demand when price changes (Consumers are insensitive); represented by a steep slope

how to determine demand elasticity

• Are there substitutes available?  YES – E       NO – IN

• Is the item a large % of budget?  YES – E       NO – IN

• Can the purchase be delayed?     YES – E       NO – IN

marginal product

amount change in product based on adding one more unit of input

average product

number of units of output per inputs

diminishing marginal productivity

As more of any variable input is added to a fixed amount of other inputs, the rate at which output increases is less and less

fixed costs

costs that remain constant regardless of production levels

variable costs

costs that change when production increases or decreases

supply

The quantity of a product or service that producers are willing to make available for sale at various prices

supply schedule

a listing of prices and quantities that would be supplied at various prices

supply curve

A graphic representation of the quantities supplied at each and every price; slopes up and to the right

the law of supply

• The quantity of an economic product supplied varies directly with its price

• High Prices = High Supply

• Low Prices = Low Supply

• increased cost of inputs

• new technology

• subsidies

• taxes

• regulation

• future expectations of prices

• number of suppliers

determinants of supply

supply elasticity

• How much does Supply change when price is changed?

• If change is significant – Supply is Elastic (gradual slope)

• If change is minimal – Supply is Inelastic (steep slope)

• Primary factor is Supply Elasticity is the cost involved in supplying more of a product.

equilibrium

the price at which supply and demand are the same

shortage

• the condition in which demand is greater than supply at a certain price. (Has an upward pressure on prices - prices increase)

• S < D

• below equilibrium

surplus

• the condition at which supply is greater than demand at a certain price.  (Has a downward pressure on prices - prices decrease)

• S > D

• aboe equilibrium

subsidies

the government can decrease supply and prevent surpluses, and keep prices stable

taxes

Higher sales, production, or excise taxes mean costs are higher and lowers supply. (V-V)

regulations

rules about production or distribution that require higher costs, will lower supply (V-V)

price floors

when the gov’t sets a price limit that is higher than the market price (minimum wage)

price ceilings

when the gov’t sets a price limit that is below the equilibrium price (rent control)