Chapter 3 Review Supply & Demand

What is a market: -an institution that brings together buyers and sellers.

Markets: -assume many buyers and many sellers of a standardized product.

The law of demand: -price and quantity demanded are inversely related.

The demand curve shows the relationship between: -price and quantity demanded.

Economists use the term demand to refer to: -schedule of various combinations of market prices and amounts demanded.

- The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. direct, inverse

What is the income effect? -when the price of a product increases, a consumer is able to buy less of it with a given money income.

A demand curve: -indicates the quantity demanded at each price in a series of prices.

The most important variable in determining the quantity demanded/supplied is: PRICE

Substitution Effect an increase in the price of a product will reduce the amount of it purchased because: consumers will substitute other products for the one whose price has risen Eg. Coke → Pepsi

The income and substitution effects account for the downward sloping demand curve

Complementary Goods goods that are used together with another good hot dog buns with hot dogs

Determinants of Demand Tastes Number of buyers Income- normal v. inferior goods (Independent goods) Prices of related goods Consumer expectations Substitute goods Complementary goods

Change in DEMAND versus change in QUANTITY DEMANDED

The law of supply producers will offer more of a product at high prices than they will at low prices

The supply curve shows the relationship between price and quantity supplied

Determinants of Supply Change in resource prices Change in technology Change in prices of other goods Change in producer expectations Change in the number of suppliers

Price Floor Rationale Impact result

Price Ceiling Rationale Impact result