Chapter 3 – Demand and Supply Read pages I Basics of Demand A)Terminology 1)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. 2)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.

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.

B) Changes in Demand 1)A shift in a demand curve is called a change in demand. 2)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 a)Consumer preferences b)Prices of related goods and services c)Income d) Demographic characteristics e) Buyer expectations.

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.

II Basics of Supply A)Terminology 1)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.

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.

B) Changes in supply 1)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. a)Prices of factors of production. b)Returns to alternative activities. c)Technology. d)Seller expectations. e) Natural events. f) The number of sellers.

III Demand, Supply and Equilibrium A)Terminology 1)The model of demand and supply uses the demand and supply curves to explain the determination of price and quantity in a market. 2)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.

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

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

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

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

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

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

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.

IV The Circular Flow Model A)Terminology 1)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. 2)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.

V Sample Questions 1)The Law of demand asserts that a)everything has its price. b)there is no such thing as a free lunch. c)all resources are scarce. d)there is a negative relationship between the amount of something that people will purchase and the sacrifice they must make to obtain it.

d) is correct.

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

d) Is correct.

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

d) Is correct.

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

d) Is correct.