Questions and Answers
Which of the following is consistent with the law of demand?
The money prices of both goods increased, the relative price of hospital rooms increased, and the relative price of hotel suites decreased.
Hospital Room (1 day) $300----------$325, Hotel Suite (1 night) $400----------$425
What has happened to the money prices and relative prices of coffee and tea?
When firms providing wireless Internet access services reduce their prices, this will cause a(n)
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Match the following price impacts with the implications for substitutes and complements:
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All of the following pairs of goods are substitutes except the demands for eggs when the price of bacon increases.
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All of the following pairs of goods are complements except when the price of coffee decreases and the demand for tea decreases.
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Why is there likely to be a decrease in demand for grapefruit?
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According to the law of supply, there is a ________ relationship between the price and ________.
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What happens if the price of an input used to produce a good increases?
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What defines a shortage in a market?
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What happens when the price of steak rises relative to salmon?
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What does an outward shift in the supply curve indicate?
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An increase in demand occurs when a demand curve shifts to the right.
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Which of the following statements is true according to the law of supply?
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What can cause a movement along a supply curve?
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Study Notes
Law of Demand
- A reduction in the price of a good typically results in an increase in the quantity demanded, illustrated by a 5% increase in salt purchases following a price drop.
- The law of demand states that when prices rise, demand decreases, exemplified by a 5% drop in salt purchases when the price doubles.
Relative Prices
- Relative prices denote the price of one good expressed in terms of another, impacting consumer choices and demand.
- The increase in the price of a bag of coffee to $20 compared to $14 for tea leads to a decrease in the relative price of tea.
Demand Shifts
- Demand can decrease due to lower incomes or when substitutes become cheaper; e.g., a price drop in wireless service reduces demand for cable Internet.
- A shift in consumer tastes toward cable increases demand for cable Internet despite alternatives.
Complementary and Substitute Goods
- Goods can be classified as substitutes or complements based on their relationship:
- If bacon prices rise and sausage demand increases, they are substitutes.
- An increase in tennis racquet prices leading to a decrease in tennis ball demand implies they are complements.
- Significant demand shifts occur when the prices of related goods change (e.g., chicken's price affecting fish demand).
Law of Supply
- The law of supply illustrates a direct relationship between the price of a good and the quantity supplied; as price increases, so does supply.
- A movement along the supply curve occurs due to price changes, while non-price factors can shift supply leftward or rightward, such as technological improvements or increased production costs.
Market Dynamics
- An outward shift in the supply curve can result from technological advancements or additional firms entering the market, increasing equilibrium quantity and potentially lowering prices.
- A shortage occurs when quantity demanded exceeds quantity supplied, generally when prices are set below equilibrium levels, resulting in upward pressure on prices.
Demand and Supply Interaction
- Equilibrium in the market is achieved when quantity demanded equals quantity supplied, influenced by shifts in demand or supply.
- If both demand and supply increase, equilibrium price may remain constant, while varying shifts lead to different outcomes in price and quantity.
Impact of External Factors
- Factors influencing demand include consumer tastes, income levels, and prices of related goods.
- An increase in input costs for producers (e.g., aluminum for soft drinks) results in a decrease in supply, affecting pricing dynamics in the market.
Key Concepts in Market Behavior
- Inferior goods see demand drop as consumer income rises, highlighting the inverse relationship between income levels and demand for specific goods (e.g., reduced demand for eggs).
- The market clearing price (or equilibrium price) is vital for balancing supply and demand in competitive markets, ensuring efficient allocation of resources.
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Test your knowledge of the concepts in Chapter 3 of Economics with these flashcards. Each card presents a scenario or question related to the law of demand and price changes. Perfect for reinforcing key economic principles!
