Economics Chapter 3 Flashcards
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Questions and Answers

Which of the following is consistent with the law of demand?

  • A reduction of the price of salt led to a 5 percent increase in the quantity of salt purchased. (correct)
  • A doubling of the price of salt led to a 5 percent drop in the quantity of salt purchased. (correct)
  • An increase in the price of milk led to a 10 percent increase in the quantity of milk purchased.
  • An increase in the price of bread led to a decrease in the quantity of bread purchased.
  • 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?

  • The money price of coffee has risen, and the relative price of tea has risen.
  • The money price of coffee has fallen, and the relative price of tea has fallen.
  • The money price of coffee and tea have risen, with the relative price of coffee falling and relative price of tea rising. (correct)
  • The price of both goods remained unchanged.
  • When firms providing wireless Internet access services reduce their prices, this will cause a(n)

    <p>Decrease in demand for cable-based Internet access.</p> Signup and view all the answers

    Match the following price impacts with the implications for substitutes and complements:

    <p>If the price of bacon rises, the demand for sausage increases = Substitutes If the price of tennis racquets falls, the demand for tennis balls increases = Complements If the price of coffee rises, the demand for sugar falls = Substitutes If the price of automobiles rises, the demand for motorbikes falls = Substitutes</p> Signup and view all the answers

    All of the following pairs of goods are substitutes except the demands for eggs when the price of bacon increases.

    <p>True</p> Signup and view all the answers

    All of the following pairs of goods are complements except when the price of coffee decreases and the demand for tea decreases.

    <p>True</p> Signup and view all the answers

    Why is there likely to be a decrease in demand for grapefruit?

    <p>People will buy less grapefruit because their tastes and preferences have changed.</p> Signup and view all the answers

    According to the law of supply, there is a ________ relationship between the price and ________.

    <p>Positive, the quantity supplied</p> Signup and view all the answers

    What happens if the price of an input used to produce a good increases?

    <p>It will lead to a decrease in supply.</p> Signup and view all the answers

    What defines a shortage in a market?

    <p>When quantity supplied is less than quantity demanded.</p> Signup and view all the answers

    What happens when the price of steak rises relative to salmon?

    <p>David would be expected to purchase less steak.</p> Signup and view all the answers

    What does an outward shift in the supply curve indicate?

    <p>An increase in supply.</p> Signup and view all the answers

    An increase in demand occurs when a demand curve shifts to the right.

    <p>True</p> Signup and view all the answers

    Which of the following statements is true according to the law of supply?

    <p>As price increases, quantity supplied increases.</p> Signup and view all the answers

    What can cause a movement along a supply curve?

    <p>A change in price.</p> Signup and view all the answers

    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!

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