ECO 2023 Principles of Microeconomics Chapter 3 Demand Supply and the Market Process Study Guide 7 Learning Goals Key terms 1 Investigate and describe consumer behavior Chapter heading Consumer Choice and the Law of Demand Law of demand The law of demand states that there is an inverse or negative relationship between the prices of a good or service and there quantity of it that consumers are willing to purchase Substitutes Products that serve similar purposes An increase in the price of one will cause an increase in demand for the other examples are hamburgers and tacos butter and margarine Chevrolets and Fords When the price of a good increases why do you usually buy less of it When the price of a good increases people cut back on their purchases of it and turn to substitute products 2 Distinguish a change in demand from a change in quantity demanded Chapter heading Changes in Demand Versus Changes in Quantity Demanded Key term Complements Products that are usually consumed jointly for example bread and butter hot dogs and hot dog buns A decrease in price of one will cause an increase in demand for the other What is the difference between demand and quantity demanded A change in demand is a shift in the entire demand curve A change in quantity demanded is a movement along the same demand curve Draw two separate demand curves For one illustrate a change in demand For the other illustrate a change in quantity demanded Factors that cause a change in demand income 1 Changes in consumer in the market number of consumers 2 Changes in the 3 Changes in the price of a related good expectations 4 Changes in changes 5 Demographic tastes and preferences 6 Changes in consumer Identify two goods that you consider to be substitutes A Coke and B Pepsi Complete the following sentences by inserting your complement names and circling the correct options If the price of A Coke rose the demand quantity demanded of A Coke would rise fall and consumers would purchase more less A Coke The demand quantity demanded for B Pepsi would rise fall causing the demand curve to shift right left If the price of A Coke fell the demand quantity demanded of A Coke would rise fall and consumers would purchase more less A Coke The demand quantity demanded for B Pepsi would rise fall causing the demand curve to shift right left Identify two goods that you consider to be complements A Hot dogs and B Hot dog buns Complete the following sentences by inserting your complement names and circling the correct options If the price of A Hot dogs rose the demand quantity demanded of A Hot dogs would rise fall and consumers would purchase more less A Hot dogs The demand quantity demanded for B Hot dog buns would rise fall causing the demand curve to shift right left If the price of A Hot dogs fell the demand quantity demanded of A Hot dogs would rise fall and consumers would purchase more less A Hot dogs The demand quantity demanded for B Hot dog buns would rise fall causing the demand curve to shift right left 3 Investigate and describe firm behavior Chapter heading Producer Choice and the Law of Supply Key terms Opportunity cost of production The total economic cost of producing a good or service Profit An excess of sales revenue relative to the opportunity cost of production Loss A deficit of sales revenue relative to the opportunity cost of production Law of Supply A principle that states there is a direct relationship between the price of a good and the quantity of its producers are willing to supply What is the role of profits and losses in a market economy They determine which products and firms will expand and survive and which will contract and be driven from the market When the price of a good increases why is a firm usually willing to make more of it Higher prices increase the reward entrepreneurs get from selling their products The more profitable it is to produce a product the more of its entrepreneurs will be willing to supply 4 Distinguish a change in supply from a change in quantity supplied Chapter heading Changes in Supply Versus Changes in Quantity Supplied What is the difference between supply and quantity supplied When prices changes quantity supplied changes but supply does not change This is movement along the supply curve Draw two separate supply curves For one illustrate a change in supply For the other illustrate a change in quantity supplied Factors that cause a change in supply 1 Resource Prices 2 Technology and Political Disruptions Nature 3 Elements of 4 Taxes 5 Build a market model and illustrate how equilibrium is reached Chapter heading How Market Prices are Determined Supply and Demand Interact Key terms Market An abstract concept encompassing the forces of demand and supply and the interaction of buyers and sellers with the potential for exchange to occur Equilibrium A state in which the conflicting forces of demand and supply are in balance Economic efficiency When a market reaches equilibrium all the gains from trade have been fully realized Draw the market supply and demand model Identify three prices one that would produce a surplus one that would produce a shortage and one that would result in market equilibrium 6 Demonstrate how markets respond to changes in demand and supply Chapter heading How Markets Respond to Changes in Demand and Supply Draw the market supply and demand model Illustrate how each of the following changes would change equilibrium price and quantity Draw the market supply and demand model Illustrate how each of the following simultaneous changes would change equilibrium price and quantity 7 Recognize how prices and the invisible hand principle create market order Chapter heading How Markets Respond to Changes in Demand and Supply sections Invisible Hand Principle and Prices and Market Order Provide an example of the invisible hand working in a market As the invisible hand principle indicates market prices are generally able to bring the self interest of individuals into harmony with the general welfare of society The system is dependent on two things 1 competitive market conditions and 2 well defined and secure property rights Functions of market prices 1 If there is excess supply price will fall 2 If there is excess demand price will rise 3 In equilibrium there is no excess supply nor excess demand Price Quantity Balance
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