Law of Demand and Supply Reviewer

Contemporary World Midterm Exam

The Basic Decision-Making Unit

It is an organization that transforms

resources (inputs) into products (outputs).

Firms are the primary producing units in a

market economy.

It is a person who organizes,

manages, and assumes the risks of a firm,

taking a new idea or a new product and

turning it into a successful business.

_____ are the consuming units in an

economy.

It shows

the connections between

firms and households in

input and output markets.

circular flow of

economic activity shows

the connections between

_____ and________ in

input and output markets.

These are the markets

in which goods and

services are exchanged.

Output, or product,

markets

These are the

markets in which

resources—labor, capital,

and land—used to

produce products, are

exchanged.

Input Markets

Payments flow in the ________

direction as the physical flow of

resources, goods, and services

(counterclockwise).

Input Market includes?

Capital, Labor, and Land

The ________ , in which households supply

work for wages to firms that demand labor.

Labor Market

The ________ , in which households supply

their savings, for interest or for claims to future

profits, to firms that demand funds to buy capital

goods.

Capital Market

The _________ , in which households supply

land or other real property in exchange for rent.

Land Market

In Determinants of Household Demand, a household’s decision about the quantity of a particular

output to demand depends on:

Non Price Determinants of Demands

It is the amount

(number of units) of a product that a

household would buy in a given time

period if it could buy all it wanted at

the current market price.

Quantity demanded

A table showing

how much of a given

product a household

would be willing to

buy at different prices.

demand schedule

are

usually derived from

demand schedules.

demand curves

a graph illustrating

how much of a given

product a household

would be willing to

buy at different prices.

demand curve

states that there is a

negative, or inverse,

relationship between

price and the quantity

of a good demanded.

law of demand

This means that

demand curves slope

downward.

law of demand

means “all other things being

constant”

Ceteris Paribus

Which is not part of other Properties of Demand Curves

the sum of all households

wages, salaries, profits, interest

payments, rents, and other forms of

earnings in a given period of time.

Income

is the total value

of what a household owns minus what

it owes.

Wealth or net worth

It is

a flow measure.

Income

It is a stock measure.

Wealth

_______ are goods for which

demand goes up when income is

higher and for which demand goes

down when income is lower.

Normal Goods

_______ are goods for which

demand falls when income rises.

Inferior Goods

_______ are goods that can serve as

replacements for one another; when the

price of one increases, demand for the

other goes up.

Substitutes

_______ are goods that “go

together”; a decrease in the price of one

results in an increase in demand for the

other, and vice versa.

Complements

A change in demand is

not the same as a change

in quantity demanded.

A higher

price causes lower

quantity demanded.

Changes in determinants

of demand, other than

price, cause a change in

demand, or a shift of the

entire demand curve

When demand shifts to

the left, demand

increases.

Change in price of a good or service

leads to?

Change in quantity demanded

(Movement along the curve)

Change in the non-price determinants of demand

leads to?

Change in demand

(Shift of curve)

Higher income

decreases the demand

for an?

Inferior good

Higher income

increases the demand

for a?

Normal good

Demand for a good or service can be

defined for an ________

Individual Household

The sum of all the

quantities of a good or service demanded

per period by all the households buying in

the market for that good or service.

Market demand

A table

showing how much of a product

firms will supply at different

prices.

Supply Schedule

represents the

number of units of a product that

a firm would be willing and able to

offer for sale at a particular price

during a given time period.

Quantity Supplied

a graph illustrating how much

of a product a firm will supply at different prices.

Supply curve

states that there is a

positive relationship

between price and

quantity of a good

supplied.

Law of supply

This means that

supply curves

typically have a

positive slope.

Law of supply

Determinants of Supply

Non-Price Determinants of Supply

A change in supply is

not the same as a

change in quantity

supplied.

a higher

price causes higher

quantity supplied, and

a move along the

supply curve.

changes in determinants of supply, other

than price, cause an increase in supply, or a shift of the

entire supply curve, from

When supply shifts

to the _______ , supply

increases. This

causes quantity

supplied to be

greater than it was

prior to the shift, for

each and every price

level.

right

Change in price of a good or service

leads to?

Change in quantity supplied

(Movement along the curve)

Change in the non-price determinants of supply

leads to?

Change in supply

(Shift of curve)

The supply of a good or service can be defined

for an _________.

Individual firm

the sum of all the quantities of

a good or service supplied per period by all the

firms selling in the market for that good or

service.

Market Supply

the

horizontal summation of individual firms’ supply

curves.

Market Supply

The operation of the market

depends on the interaction

between _______ and _______.

buyers and sellers

the condition

that exists when quantity supplied

and quantity demanded are equal.

Equilibrium

Two concepts in Market Disequilibria

Excess demand and Excess supply

the condition

that exists when quantity

demanded exceeds

quantity supplied at the

current price.

Excess demand, or

shortage

the condition

that exists when quantity

supplied exceeds quantity

demanded at the current

price.

Excess supply

This leads to

higher equilibrium price and

higher equilibrium quantity.

Higher Demand

This leads to lower equilibrium price and

higher equilibrium quantity.

Higher Supply

This leads to

lower price and lower

quantity exchanged.

Lower demand

This leads to

lower price and lower

quantity exchanged.

Lower Supply

The _________ leads to

lower price and lower

quantity exchanged.

Magnitudes of Change

Concept of Elasticity:

Elasticity and Price Elasticity of Demand

the ratio of the percentage

increase in quantity to the percentage

increase in what affects it.

Elasticity

refers to

the ratio between a percentage change

in quantity demanded due to a

corresponding percentage change in

price.

Price Elasticity of Demand

3 classification of demand schedule

Elastic demand, Unitary Elasticity, and Inelastic demand

Elasticities are numerically greater than one

Elastic Demand

Elasticities are equal to one

Unitary Elasticity

Elasticities are less than to one

Inelastic demand