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Quiz #3 Notes Supply and Demand •Voluntary •Utility •Law exchange – buyers and sellers trade freely – Ability to satisfy consumers wants. Fancy word for satisfaction. of diminishing utility – additional satisfaction decreases from buying one more unit. •Real income effect – If Price increases or decreases and income stays the same, the quantity purchased will decrease or increase. •Substitution effect – If two items take care of same need and the price increases of one of them, people will buy the other. Example: Butter vs. Margarine •Elasticity – Measures how quantity demanded or quantity supplied changes according to price and other economic condition. •Price elasticity of demand – The change in demand based on change in Price. •Complementary good – If the price of one good goes up the demand for its complementary good will go down. Example: If the price of peanut butter goes up, people will buy less jelly. Goods that go together, like cookies and cream. •Inferior good – Goods for which the demand falls when income rises •Equilibrium •Shortages •Surplus price –Quantity demanded is equal to quantity supplied at a given Price. – Demand is greater than the supply. – Supply is greater than demand. Explain the difference between law of demand and law of supply. Demand – As price increases, demand decreases and as price decreases the demand for a good increases. Supply – As price increases, supply increases and as price decreases the supply for a good decreases. Explain the difference between an elastic demand and an inelastic demand. Give examples of each. •Elastic demand– People can do without if price increases too much. Example: Ice Cream. If ice cream is priced too high, people will buy a different good for dessert. •Inelastic demand – People cannot do without even if price increases. Example: Gasoline or a head light for your vehicle. People must have these goods. 1 What are three variables that determine demand of a product? •Population •Income •Tastes and Preferences What are four determinants of supply? •Price of inputs •Technology •Number of competitors •Taxes Use these numbers to plot a demand curve. Price Quantity Demanded 5 20 10 15 13 10 17 5 20 2 Use these numbers to plot a supply curve. Price Quantity Supplied 2 8 4 10 6 12 8 15 Use these numbers to plot the market clearing price/price equilibrium. Price Quantity demanded Quantity supplied 5 100 10 10 90 20 15 60 40 20 40 60 25 20 100 From the previous question, what is the market clearing price? ____ 2