Ch. 3: Supply and Demand: Theory

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Ch. 3 Supply and Demand Theory
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Demand

• Demand is the _________and ability of buyers to
  purchase different quantities of a good at
  different prices during a _______________.
• The Law of Demand as the price of a good rises,
  ______________ of that good falls as the price
  of a good falls, quantity demanded of that good
  rises.

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Prices

• Absolute Price the price of a good _____________
  (Ex A new Car costs 30,000).
• Relative Price the price of a good
  _______________ (Ex A new Car costs 30
  computers)
• Relative price is calculated by __________the
  absolute price of one product with the absolute
  price of another product (Ex A Car costs
  30,000 A Computer costs 1,000 The relative
  cost of a Car is 30 Computers)

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Why Quantity Demanded Goes Down As Price Goes Up

• People ___________ lower-priced goods for
  higher-priced goods.
• The Law of Diminishing Marginal Utility for a
  given time period, the marginal (additional)
  utility or ________ gained by consuming equal
  ______________units of a good will ___________ as
  the amount consumed increases.

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Four Ways to Represent The Law Of Demand

• In Words As price rises, _________________
• In Symbols P?Qd?
• In a ________ Schedule
• In a ___________ Curve

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Demand Schedule
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Causes of Change in the Demand Curve

• Income
• Preferences
• __________________
• Number of Buyers
• ______________________

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Income Changes in DemandShifts in Demand Curves

• The demand for a good increases if people are
  willing and able to buy more of the good at all
  prices.
• A normal good is a good the ________ for which
  rises(falls) as ________ rises(falls).
• An inferior good is a good the _______ for which
  rises(falls) as _______ falls(rises).

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Preferences, Substitutes and Related Goods

• Preferences affect the amount of a good they are
  willing to buy at a particular price (Ex
  favorite food, favorite author)
• If the demand for Coke ________ as the price for
  _____________, and the _______ for Coke falls as
  the ______________, Coke and Pepsi
  are___________.
• If __________ of product A falls as the
  __________ for product B rises, and the price of
  product A rises as the _______________, A and B
  are Related Goods (Ex Ketchup and Hot Dog Buns).

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Shifting the Demand Curve

• A change in Demand causes a __________________
  curve.
• A change in the _________ Demanded _______ a
  point ______ the current Demand curve.
• If Demand increases, the curve shifts to the
  right.
• If Demand decreases, the curve shifts to the left.

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Q A

• As Sandis income rises, her demand for popcorn
  rises. As Marks income falls, his demand for
  prepaid telephone cards rises. What kinds of
  goods are popcorn and telephone cards for the
  people who demand each?
• Why are demand curves downward sloping?
• Give an example that illustrates how to derive a
  market demand curve.
• What factors can change demand? What factors can
  change quantity demanded?

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Supply

• Supply is the _______ and _____ of sellers to
  _______ and ____________ different quantities of
  a good at different prices during a specific
  period of time
• Law of Supply As the price of a good ____, the
  quantity _______ of the good ____ and as the
  price of a good falls, the quantity supplied of
  the good falls.

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The Supply Curve
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Why Supply Curves Slope Upwards

• An Upward-sloping supply curve reflects the fact
  that under certain conditions, a higher price is
  an _______ to producers to produce more of a good.

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Market Supply Curve

• The Market Supply Curve represents the _____
  _____ combinations for all sellers of a
  particular good.
• An Individual supply curve represents the
  price-quantity combinations for a single seller

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Supply Curve Shifters

• If the price of a relevant ______ changes, the
  supply curve will ____ (EX wood prices
  increase, cost of a new house increases as well)
• ________ can increase the quantity supplied by
  producing more of a product with the same
  quantity of resources supplied.
• If the _________ increase, the supply curve
  will shift.
• If the price of a good is _________ to be higher
  in the future, the supply curve will shift

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Supply Curve Shifters

• _______ increase unit costs
• Government ___________ can change the supply
  curve by increasing or limiting production.

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Shifting the Supply Curve

• A Change in the Supply Curve is a shift in the
  Supply Curve, not merely moving up and down the
  same curve.

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Q A

• Which way (if any) does the Supply Curve shift if
  there is a decrease in the number of sellers? If
  there is a per-unit tax is placed on the
  production of the good? If the price of a
  relevant resource falls?
• Why do most Supply Curves slope upward?

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The Market

• Putting Supply and Demand Together

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Market Language

• If the quantity supplied is greater than the
  quantity demanded, the good has a ________ or
  excess supply.
• If quantity demanded is greater than quantity
  supplied, a ________ or excess demand exists.
• The price at which a quantity demanded equals the
  quantity supplied is the ______________, or the
  market-clearing price.
• A market that has too much of a good or too
  little of a good is considered to be in
  ________________.

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Moving to Equilibrium

• 1. Why does the price fall when there is a
  surplus?
• 2. Why does the price rise when there is a
  shortage?
• _______________________________________.

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Price Controls

• Price Ceiling a __________ mandated price above
  which __________ may not be made.
• Price Ceilings may cause
• _________
• Fewer Exchanges
• Non-price Rationing Devices
• Buying and Selling at a Prohibited Price (Black
  Market)
• Tie in Sales

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Price Floor

• A price floor is a government _________ minimum
  price _____ which legal trades cannot be made.
• Price floors can cause ________ and Fewer
  Exchanges.

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Q A

• Do buyers prefer lower prices to higher prices?
• Who might argue for a Price Ceiling? A Price
  Floor? Why would they argue their viewpoint?