Mills Econ 50 Ch 3

What is a demand curve?

The same thing as a demand schedule (your book uses this term). The curve is derived from the definite relationship between the market price of a good and the quantity demanded of that good (all other things constant). That relationship is called the demand curve.

What is the law of downward sloping demand?

When the price of a good increases demand for the good decreases (other things constant).

Give two reasons the demand curve goes down.

The substitution effect and the income effect.

What is the substitution effect?

It's one of the reasons that demand for a good falls when the price of the good rises. it basically says that if the price of a good rises I will substitute a cheaper similar good instead.

What is the income effect?

One of the causes of downward sloping demand. If you have an income of $1 and a good costs $.30 normally, and then the price of the good goes up to $.50 it is the same thing as being $.20 poorer than you were before. Because you are poorer you will reduce your consumption. (47)

What are the forces behind the demand curve?

1. The average income of consumers
2. the size of the market
3. the prices and availability of related goods
4. tastes and preferences
5. special influences
(48)

Describe what happens to the graph when a demand curve shifts

When the demand curve shifts if physically moves either right (increase in demand) or left (decrease in demand).

What is the difference between a change in demand and a shift in demand

a change in demand indicates a different point on the same demand curve. a shift in demand tells you that the whole curve moved left or right because of a change in one of the forces behind a demand curve. (51)

What is a supply curve?

The supply curve for a commodity
shows the relationship between its market price and tne amount of that commodity that producers are willing to produce and sell, other things held constant.

What is the helpful mnemonic for how the demand and supply curves go together?

Demand goes down to the ground
supply goes up to the sky (demand down, supply sky)

What are the forces behind the supply curve?

1. Costs of production
2. Prices of related goods
3. Government policy
4. special influcences

What are the forces determining the costs of production?

1. Prices of inputs (such as labor, energy, ingredients or parts)
2. Technological advances

What happens when the supply curve shifts?

The physical curve moves left (for a contraction in supply) or right (for an expansion of supply).

What is a supply shift?

A supply shift is when changes in the factors determining the supply curve change and cause supply to expand or contract. This is not the same as a change in price, which is a move along the existing supply curve.

What is market equilibrium (conceptually and on the graph)

Conceptually: Market equilibrium occurs when the amount of goods and services demanded is equal to the quantity of goods and services demanded.
On the graph: It's the intersection of teh supply curve with the demand curve.

What happens when the forces behind either supply or demand change?

There is either a shift in the demand curve OR a shift in supply curve (NOT BOTH). This also yields a change in the market equilibrium, market price and market quantity (57).