Principles of Microeconomics Chapter 3

Questions and Answers

What is a market?

consists of all buyers or sellers of that good

What does a demand curve represent?

a schedule or graph showing the quantity of a good that buyers wish to buy at each price

What is the substitution effect?

the change in the quantity demanded of a good that results because buyers switch to or from substitutes when the price of the good changes

What is the income effect?

the change in the quantity demanded of a good that results because the change in the price of a good changes the buyers purchasing power Signup and view all the answers

What is a buyer's reservation price?

the largest $ amount that a buyer would be willing to pay for a good Signup and view all the answers

What does a supply curve show?

a graph or schedule showing the quantity of a good that sellers wish to sell at each price Signup and view all the answers

What is a seller's reservation price?

the smallest $ amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost Signup and view all the answers

What is market equilibrium?

occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price Signup and view all the answers

What is excess supply?

the amount by which quantity supplied exceeds quantity demanded when the price of a good exceeds the equilibrium price Signup and view all the answers

What is excess demand?

the amount by which quantity demanded exceeds quantity supplied when the price of a good lies below the equilibrium price Signup and view all the answers

What is a price ceiling?

a max allowable price, specified by law Signup and view all the answers

What describes a change in the quantity demanded?

a movement along the demand curve that occurs in response to a change in price Signup and view all the answers

What indicates a change in demand?

a shift in the entire demand curve Signup and view all the answers

What signifies a change in supply?

a shift in the entire supply curve Signup and view all the answers

What does a change in the quantity supplied refer to?

a movement along the supply curve which occurs in response to a change in price Signup and view all the answers

What are complements?

an increase in the price of one causes a leftward shift in the demand curve for the other (or a decrease causes a rightward shift) Signup and view all the answers

What are substitutes?

an increase in the price of one causes a rightward shift in the demand for the other (or if a decrease causes a leftward shift) Signup and view all the answers

What is a normal good?

demand curve shifts rightward when the incomes of buyers increase and a leftward shift when the incomes of buyers decrease Signup and view all the answers

What is an inferior good?

demand curve shifts leftward when the incomes of buyers increase and rightward when the incomes of buyers decrease Signup and view all the answers

What is a buyer's surplus?

the difference between the buyer's reservation price and the price he or she actually pays Signup and view all the answers

What is a seller's surplus?

the difference between the price received by the seller and his or her reservation price Signup and view all the answers

What is total surplus?

the difference between the buyer's reservation price and the seller's reservation price Signup and view all the answers

What does 'cash on the table' refer to?

economic metaphor for unexploited gains from exchange Signup and view all the answers

What is the socially optimal quantity?

the quantity of a good that results in the maximum possible economic surplus from producing and consuming the good Signup and view all the answers

What does efficiency refer to in economics?

occurs when all goods and services are produced and consumed at their respective socially optimal levels Signup and view all the answers

What is the Efficiency Principle?

When the economic pie grows larger, everyone can have a larger slice Signup and view all the answers

What does the Equilibrium Principle state?

a market that leaves no unexploited opportunities for individuals but may not exploit all gains achievable through collective action Signup and view all the answers

What does market supply represent?

the sum of all of the quantity supplied of all individual firms in the market for each price level Signup and view all the answers

Study Notes

Market Concepts

Market: Comprises all buyers and sellers of a particular good.
Market Equilibrium: Achieved when all buyers and sellers are satisfied at a market price, with quantity supplied equaling quantity demanded.

Demand and Supply Curves

Demand Curve: Visual representation showing the quantity of a good that buyers want to purchase at various prices.
Supply Curve: Graph illustrating the quantity that sellers are willing to sell at different price levels.

Demand Changes

Substitution Effect: Change in quantity demanded due to buyers switching between goods based on price fluctuations.
Income Effect: Change in demand driven by how price alterations impact buyers' purchasing power.
Change in Demand: A complete shift in the demand curve, indicating varied buyer preferences at the same price.
Change in Quantity Demanded: Movement along the demand curve as a result of a price change.

Supply Changes

Change in Supply: The entire supply curve shifts, reflecting a change in sellers' willingness to sell at various prices.
Change in Quantity Supplied: Movement along the supply curve due to price adjustments.

Reservation Prices

Buyer's Reservation Price: Maximum price a buyer is willing to pay for a good.
Seller's Reservation Price: Minimum price a seller would accept, typically linked to marginal cost.

Surplus and Shortage

Excess Supply: Occurs when quantity supplied exceeds quantity demanded at a price above equilibrium, leading to surplus.
Excess Demand: Happens when quantity demanded surpasses quantity supplied at a price below equilibrium, creating shortages.

Economic Efficiency and Surplus

Buyer's Surplus: The difference between what a buyer is willing to pay versus what they actually pay.
Seller's Surplus: The difference between the received price and the seller's minimum acceptable price.
Total Surplus: The overall difference between buyer's and seller's reservation prices.
Socially Optimal Quantity: The quantity that maximizes total economic surplus in production and consumption.
Efficiency: Occurs when goods are produced and consumed at optimal levels.

Price Controls

Price Ceiling: Legally established maximum price for a good, intended to prevent prices from rising too high.

Goods Classification

Normal Good: Demand increases when buyers' incomes rise; demand declines as incomes fall.
Inferior Good: Demand decreases as buyers' incomes increase; demand rises when incomes decline.
Complements: Goods where an increase in price for one leads to a decrease in demand for the other.
Substitutes: Goods where a price rise in one may increase demand for the other.

Economic Principles

Efficiency Principle: Suggests that overall economic improvement allows for better distribution among individuals.
Equilibrium Principle: Indicates that markets can reach a state without wasted opportunities but may not capture all available collective benefits.
Cash on the Table: Represents potential economic gains that remain untapped in a transaction.

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Test your understanding of key concepts in Chapter 3 of Principles of Microeconomics, focusing on supply and demand. This quiz covers essential terms such as market, demand curve, and substitution effect, helping you grasp their definitions and implications.