Chapter 3

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Chapter 3 Demand and SupplyRead pages 60 - 80

• I Basics of Demand
• Terminology
• The quantity demanded of a good or service is the
  quantity buyers are willing and able to buy at a
  particular price during a particular period, all
  other things unchanged.
• The demand schedule is a table that shows the
  quantities of good or service demanded at
  different prices during a particular period, all
  other things unchanged.

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• 3) A demand curve is a graphical representation
  of a demand schedule.
• 4) A movement along a demand curve that results
  from a change in price is called a change in the
  quantity demanded.
• 5) The law of demand holds that for virtually all
  goods and services, a higher price induces a
  reduction in quantity demanded and a lower price
  induces an increase in quantity demanded.

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• B) Changes in Demand
• A shift in a demand curve is called a change in
  demand.
• A variable that can change the quantity of a good
  or service demanded at each price is called a
  demand shifter.
• 3) Types of demand shifters
• Consumer preferences
• Prices of related goods and services
• Income
• d) Demographic characteristics
• e) Buyer expectations.

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• 4) If a reduction (an increase) in the price of
  one good increases (reduces) the demand for
  another, the two goods are called complements.
• 5) If a reduction (an increase) in the price of
  one good reduces (increases) the demand for
  another, the two goods are called substitutes.
• 6) A good for which demand increases when income
  increases is called a normal good.
• 7) A good for which demand decreases when income
  increases is called an inferior good.

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• II Basics of Supply
• Terminology
• The quantity supplied of a good or service is the
  quantity sellers are willing to sell at a
  particular price during a particular period, all
  other things unchanged.
• 2) The supply schedule is a table that shows the
  quantities supplied at different prices during a
  particular period, all other things unchanged.

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• 3) A supply curve is a graphical representation
  of a supply schedule. It shows the relationship
  between price and quantity supplied during a
  particular period, all other things unchanged.
• 4) A movement along a supply curve that results
  from a change in price is called a change in the
  quantity supplied.
• 5) There is no law of supply as there is a law of
  demand. Supply curves can have a negative slope.

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• B) Changes in supply
• A shift in a supply curve is called a change in
  supply.
• 2) A variable that can change the quantity of a
  good or service supplied at each price is called
  a supply shifter.
• 3) Types of supply shifters.
• Prices of factors of production.
• Returns to alternative activities.
• Technology.
• Seller expectations.
• e) Natural events.
• f) The number of sellers.

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• III Demand, Supply and Equilibrium
• Terminology
• The model of demand and supply uses the demand
  and supply curves to explain the determination of
  price and quantity in a market.
• The equilibrium price in any market is the price
  at which quantity demanded equals quantity
  supplied.
• 3) The equilibrium quantity is the quantity
  demanded and supplied at the equilibrium prices.

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• 4) A surplus is the amount by which the quantity
  supplied exceeds the quantity demanded at the
  current price.

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• 5) A shortage is the amount by which the quantity
  demanded exceeds the quantity supplied at the
  current price.

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• B) Some illustrations.
• 1) An increase in demand will raise the
  equilibrium price and quantity.

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• 2) A decrease in demand will reduce the
  equilibrium price and quantity.

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• 3) An increase in supply will reduce the
  equilibrium price and increase the equilibrium
  quantity.

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• 4) A decrease in supply will increase the
  equilibrium price and decrease the equilibrium
  quantity.

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• 5) Simultaneous changes in supply and demand can
  produce uncertain changes in either the price or
  the quantity. For example, a simultaneous
  decreases in supply and demand will reduce the
  equilibrium quantity but may increase, decrease
  or do nothing to the equilibrium price.

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• IV The Circular Flow Model
• Terminology
• The circular flow model provides an overview of
  how markets work and how they are related to each
  other. It shows flows of spending and income
  through the economy.
• It shows that goods and services that households
  demand are supplied by firms in the product
  markets.
• 3) It shows that goods and services that firms
  demand are supplied by households in the factor
  markets.

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• V Sample Questions
• The Law of demand asserts that
• everything has its price.
• there is no such thing as a free lunch.
• all resources are scarce.
• there is a negative relationship between the
  amount of something that people will purchase and
  the sacrifice they must make to obtain it.

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• d) is correct.

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• 2) Which of the following will not cause a shift
  in the demand curve for Coca-Cola?
• A change in the price of a close substitute,
  Pepsi.
• A highly successful Coca-Cola commercial aired on
  television during the Super Bowl.
• A decrease in consume incomes.
• A decrease in the price of Coca-Cola.

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• d) Is correct.

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• 3) Which of the following is not a characteristic
  of equilibrium in a market?
• Quantity supplied equals quantity demanded.
• The demand curve and the supply curve intersect.
• No surplus or shortage exists.
• Supply equals demand.

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• d) Is correct.

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• 4) An increase in supply would cause demand to
• increase to meet the higher quantity produced.
• decrease since there is excess supply.
• either increase or decrease, depending on the
  degree of the supply curve shift.
• neither increase nor decrease, but the quantity
  demanded would increase.

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• d) Is correct.