Ch. 3 – Demand, Supply, and Market Equilibrium

A market:

is an institution that brings together buyers and sellers.

Markets, viewed from the perspective of the supply and demand model:

assume many buyers and many sellers of a standardized product.

The law of demand states that, other things equal:

price and quantity demanded are inversely related.

Graphically, the market demand curve is:

the horizontal sum of individual demand curves.

The demand curve shows the relationship between:

price and quantity demanded.

Economists use the term "demand" to refer to:

a 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

When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes the:

income effect.

A demand curve:

indicates the quantity demanded at each price in a series of prices.

In presenting the idea of a demand curve, economists presume the most important variable in determining the quantity demanded is:

the price of the product itself.

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.

The income and substitution effects account for:

the downward sloping demand curve.

When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:

the substitution effect.

When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes:
A. an inferior good.

the income effect

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The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is:

price

One reason that the quantity demanded of a good increases when its price falls is that the:

lower price increases the real incomes of buyers, enabling them to buy more

When the price of Nike soccer balls fell, Ronaldo purchased more Nike soccer balls and fewer Adidas soccer balls. Which of the following best explains Ronaldo’s decision to buy more Nike soccer balls?

the substitution effect

Steve went to his favorite hamburger restaurant with $3, expecting to buy a $2 hamburger and a $1 soda. When he arrived he discovered that hamburgers were on sale for $1, so Steve bought two hamburgers and a soda. Steve’s response to the decrease in the price of hamburgers is best explained by:

the income effect

A recent study found that an increase in the Federal tax on beer (and thus an increase in the price of beer) would reduce the demand for marijuana. We can conclude that:

beer and marijuana are complementary goods.

In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by:

a change in buyer tastes.

Which of the following will not cause the demand for product K to change?
A. a change in the price of close-substitute product J
B. an increase in incomes of buyers of product K
C. a change in the price of K
D. a change in consumer tastes for K

C. a change in the price of K

Which of the following would not shift the demand curve for beef?
A. a widely publicized study that indicates beef increases one’s cholesterol
B. a reduction in the price of cattle feed
C. an effective advertising campaign by pork producers
D. a change in the incomes of beef consumers

B. a reduction in the price of cattle feed

An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction assumes that:

bicycles are normal goods.

If two goods are complements:

a decrease in the price of one will increase the demand for the other.

Blu-ray players and Blu-ray discs are:

complementary goods.

If the demand curve for product B shifts to the right as the price of product A declines, then:

A and B are complementary goods

If the price of product L increases, the demand curve for close-substitute product J will:

shift to the right

Which of the following is most likely to be an inferior good?
A. fur coats
B. ocean cruises
C. used clothing
D. steak

C. used clothing

Which of the following statements is correct?
A. An increase in the price of C will decrease the demand for complementary product D.
B. A decrease in income will decrease the demand for an inferior good.
C. An increase in income will reduce the demand for a normal good.
D. A decline in the price of X will increase the demand for substitute product Y.

A. An increase in the price of C will decrease the demand for complementary product D.

A shift to the right in the demand curve for product A can be most reasonably explained by saying that:

consumer preferences have changed in favor of A so that they now want to buy more at each possible price.

Which of the following will cause the demand curve for product A to shift to the left?
A. population growth that causes an expansion in the number of persons consuming A.
B. an increase in money income if A is a normal good.
C. a decrease in the price of complementary product C.
D. an increase in money income if A is an inferior good.

D. an increase in money income if A is an inferior good.

If X is a normal good, a rise in money income will shift the:

demand curve for X to the right

If Z is an inferior good, an increase in money income will shift the:

demand curve for Z to the left.

College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are:

inferior goods

Other things equal, which of the following might shift the demand curve for gasoline to the left?
A. the discovery of vast new oil reserves in Montana
B. the development of a low-cost electric automobile
C. an increase in the price of train and air transportation
D. a large decline in the price of automobiles

B. the development of a low-cost electric automobile

Tennis rackets and ballpoint pens are:

independent goods.

The demand for most products varies directly with changes in consumer incomes. Such products are known as:

normal goods

Assume the demand curve for product X shifts to the right. This might be caused by:

a decline in income if X is an inferior good.

Digital cameras and memory cards are:

complementary goods

A decrease in the price of digital cameras will:

shift the demand curve for memory cards to the right.

A normal good is one:

for which the consumption varies directly with incomes.

If the demand for steak (a normal good) shifts to the left, the most likely reason is that:

consumer incomes have fallen

If consumer incomes increase, the demand for product X:

may shift either to the right or left.

If products A and B are complements and the price of B decreases the:

demand for A will increase and the quantity of B demanded will increase.

If products C and D are close substitutes, an increase in the price of C will:

shift the demand curve of D to the right.

In constructing a demand curve for product X:

the prices of other goods are assumed constant.

An inferior good is:

not accurately defined by any of these statements.

An increase in the price of product A will:
A. reduce the demand for resources used in the production of A.
B. increase the demand for complementary product C.
C. increase the demand for substitute product B.
D. reduce the demand for substitute product B.

C. increase the demand for substitute product B.

Which of the following would most likely increase the demand for gasoline?
A. the expectation by consumers that gasoline prices will be higher in the future.
B. the expectation by consumers that gasoline prices will be lower in the future.
C. a widespread shift in car ownership from SUVs to hybrid sedans.
D. a decrease in the price of public transportation.

A. the expectation by consumers that gasoline prices will be higher in the future.

Suppose that tacos and pizza are substitutes, and that soda and pizza are complements. We would expect an increase in the price of pizza to:

reduce the demand for soda and increase the demand for tacos.

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When an economist says that the demand for a product has increased, this means that:

consumers are now willing to purchase more of this product at each possible price.

By an "increase in demand" economists mean that:

the quantity demanded at each price in a set of prices is greater.

Assume that the demand curve for product C is downsloping. If the price of C falls from $2.00 to $1.75:

a larger quantity of C will be demanded

An increase in the quantity demanded means that:

price has declined and consumers therefore want to purchase more of the product.

An increase in product price will cause:

quantity demanded to decrease.

In moving along a demand curve which of the following is NOT held constant?
A. the price of the product for which the demand curve is relevant.
B. price expectations.
C. consumer incomes.
D. prices of complementary goods.

A. the price of the product for which the demand curve is relevant.

In which of the following statements are the terms "demand" and "quantity demanded" used correctly?
A. When the price of ice cream rose, the demand for both ice cream and ice cream toppings fell.
B. When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell.
C. When the price of ice cream rose, the demand for ice cream fell, and the quantity demanded of ice cream toppings fell.
D. None of these statements use the terms correctly.

B. When the price of ice cream rose, the quantity demanded of ice cream fell, and the demand for ice cream toppings fell.

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The law of supply indicates that, other things equal:

producers will offer more of a product at high prices than at low prices.

The upward slope of the supply curve reflects the:

law of supply.

The supply curve shows the relationship between:

price and quantity supplied.

A firm’s supply curve is upsloping because:

beyond some point the production costs of additional units of output will rise.

Increasing marginal cost of production explains:

why the supply curve is upsloping.

A leftward shift of a product supply curve might be caused by:

some firms leaving an industry.

The location of the product supply curve depends on the:

production technology.

An improvement in production technology will:

shift the supply curve to the right.

Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates the:

amount of oranges that will be available at various prices has declined.

If producers must obtain higher prices than before to produce a given level of output, then the following has occurred:
A. a decrease in demand.
B. an increase in demand.
C. a decrease in supply.
D. an increase in supply.

C. a decrease in supply.

In moving along a supply curve which of the following is NOT held constant?
A. the number of firms producing this good
B. expectations about the future price of the product
C. techniques used in producing this product
D. the price of the product for which the supply curve is relevant

D. the price of the product for which the supply curve is relevant

Other things equal, if the price of a key resource used to produce product X falls, the:

product supply curve of X will shift to the right.

When the price of oil declines significantly, the price of gasoline also declines. The latter occurs because of a(n):

increase in the supply of gasoline.

An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the:

supply curve for cigarettes leftward

A government subsidy to the producers of a product:

increases product supply

Suppose that corn prices rise significantly. If farmers expect the price of corn to continue rising relative to other crops, then we would expect:

the supply to increase as farmers plant more corn

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If there is a surplus of a product, its price:

is above the equilibrium level

A market is in equilibrium:

if the amount producers want to sell is equal to the amount consumers want to buy.

At the equilibrium price:

there are no pressures on price to either rise or fall

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At the point where the demand and supply curves for a product intersect:

the quantity that consumers want to purchase and the amount producers choose to sell are the same

The rationing function of prices refers to the:

capacity of a competitive market to equate quantity demanded and quantity supplied

If there is a shortage of product X, and the price is free to change:

the price of the product will rise.

At the current price there is a shortage of a product. We would expect price to:

increase, quantity demanded to decrease, and quantity supplied to increase.

A surplus of a product will arise when price is:

above equilibrium with the result that quantity supplied exceeds quantity demanded.

If price is above the equilibrium level, competition among sellers to reduce the resulting:

surplus will increase quantity demanded and decrease quantity supplied.

If we say that a price is too high to clear the market, we mean that:

quantity supplied exceeds quantity demanded

Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will:

decrease, quantity demanded will increase, and quantity supplied will decrease.

Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will:

increase, quantity demanded will decrease, and quantity supplied will increase.

There will be a surplus of a product when:

consumers want to buy less than producers offer for sale.

Camille’s Creations and Julia’s Jewels both sell beads in a competitive market. If at the market price of $5, both are running out of beads to sell (they can’t keep up with the quantity demanded at that price), then we would expect both Camille’s and Julia’s to:

raise their price and increase their quantity supplied.

Productive efficiency refers to:

the use of the least-cost method of production.

If an economy produces its most wanted goods but uses outdated production methods, it is:

not achieving productive efficiency.

Allocative efficiency is concerned with:

producing the combination of goods most desired by society.

Allocative efficiency involves determining:

the mix of output that will maximize society’s satisfaction

The equilibrium price and quantity in a market usually produces allocative efficiency because:

marginal benefit and marginal cost are equal at that point.

Allocative efficiency refers to:

the production of the product mix most wanted by society.

Other things equal, an excise tax on a product will:

increase its price.

Assuming conventional supply and demand curves, changes in the determinants of both supply and demand will:

generally alter both equilibrium price and quantity.

Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity?
A. an increase in supply.
B. an increase in demand.
C. a decrease in supply.
D. a decrease in demand.

A. an increase in supply.

Which of the following statements is correct?
A. If demand increases and supply decreases, equilibrium price will fall.
B. If supply increases and demand decreases, equilibrium price will fall.
C. If demand decreases and supply increases, equilibrium price will rise.
D. If supply declines and demand remains constant, equilibrium price will fall.

B. If supply increases and demand decreases, equilibrium price will fall.

In which of the following instances is the effect on equilibrium price dependent on the magnitude of the shifts in supply and demand?
A. demand rises and supply rises.
B. supply falls and demand remains constant.
C. demand rises and supply falls.
D. supply rises and demand falls.

A. demand rises and supply rises.

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If the supply and demand curves for a product both decrease, then equilibrium:

quantity must decline, but equilibrium price may rise, fall, or remain unchanged

If the supply of a product decreases and the demand for that product simultaneously increases, then equilibrium:

price must rise, but equilibrium quantity may rise, fall, or remain unchanged.

Data from the registrar’s office at Gigantic State University indicate that over the past twenty years tuition and enrollment have both increased. From this information we can conclude that:

school-age population, incomes, and preferences for education have changed over the twenty-year period.

One can say with certainty that equilibrium price will decline when supply:

increases and demand decreases.

Suppose that in 2007, Ford sold 500,000 Mustangs at an average price of $18,800 per car; in 2008, 600,000 Mustangs were sold at an average price of $19,500 per car. These statements:

suggest that the demand for Mustangs increased between 2007 and 2008.

Since their introduction, prices of Blu-ray players have fallen and the quantity purchased has increased. This statement:

suggests that the supply of Blu-ray players has increased.

With a downsloping demand curve and an upsloping supply curve for a product, an increase in consumer income will:

increase equilibrium price and quantity if the product is a normal good.

With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will:

decrease equilibrium price and increase equilibrium quantity.

Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good (from the buyer’s perspective) will:

increase equilibrium price and quantity.

Over time, the equilibrium price of a gigabyte of computer memory has fallen while the equilibrium quantity purchased has increased. Based on this we can conclude that:

Increases in the supply of computer memory have exceeded increases in demand.

Suppose that in the clothing market, production costs have fallen, but the equilibrium price and quantity purchased have both increased. Based on this information we can conclude that:

Demand for clothing has grown faster than the supply of clothing.

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Price floors and ceiling prices:

interfere with the rationing function of prices.

A price floor means that:

government is imposing a minimum legal price that is typically above the equilibrium price.

An effective ceiling price will:

result in a product shortage.

An effective price floor will:

result in a product surplus.

Black markets are associated with:

ceiling prices and the resulting product shortages

A price ceiling means that:

government is imposing a legal price that is typically below the equilibrium price.

If a legal ceiling price is set above the equilibrium price:

neither the equilibrium price nor equilibrium quantity will be affected.

An effective price floor on wheat will:

result in a surplus of wheat.

Which of the following is a consequence of rent controls established to keep housing affordable for the poor?
A. Less rental housing is available as prospective landlords find it unprofitable to rent at restricted prices.
B. The quality of rental housing declines as landlords lack the funds and incentive to maintain properties.
C. Apartment buildings are torn down in favor of office buildings, shopping malls, and other buildings where rents are not controlled.
D. All of these are consequences of rent controls.

D. All of these are consequences of rent controls.

(Consider This) Ticket scalping refers to:

reselling a ticket at a price above its original purchase price.

(Consider This) Ticket scalping implies that:

event sponsors have established ticket prices at below-equilibrium levels.

(Consider This) Suppose that salsa manufacturers sell 2 million bottles at $3.50 in one year, and 3 million bottles at $3 in the next year. Based on this information we can conclude that the:

supply of salsa has increased.

(Consider This) Suppose that coffee growers sell 200 million pounds of coffee beans at $2 per pound in 2015, and sell 240 million pounds for $3 per pound in 2016. Based on this information we can conclude that the:

demand for coffee beans has increased

(Last Word) A market for human organs (rather than the current volunteer-donor system) would be expected to:

eliminate the shortage of organs

(Last Word) A market-based system of buying and selling human organs for transplant would:

increase the quantity of organs available for transplant.

(Last Word) A major objection to creating a legal market for human organs is that such a market would:

commercialize human body parts and thus diminish the special nature of human life.