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Chapter 3 Review Supply & Demand What is a market: • -an institution that brings together buyers and sellers. Markets: • -assume many buyers and many sellers of a standardized product. The law of demand: • -price and quantity demanded are inversely related. The demand curve shows the relationship between: • -price and quantity demanded. Economists use the term demand to refer to: • -schedule of various combinations of market prices and amounts demanded. - The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. • • direct, inverse What is the income effect? • -when the price of a product increases, a consumer is able to buy less of it with a given money income. A demand curve: • -indicates the quantity demanded at each price in a series of prices. The most important variable in determining the quantity demanded/supplied is: • PRICE Substitution Effect • an increase in the price of a product will reduce the amount of it purchased because: consumers will substitute other products for the one whose price has risen • Eg. Coke → Pepsi The income and substitution effects account for • the downward sloping demand curve Complementary Goods • goods that are used together with another good • hot dog buns with hot dogs Determinants of Demand • • • • • • • • Tastes Number of buyers Income- normal v. inferior goods (Independent goods) Prices of related goods Consumer expectations Substitute goods Complementary goods Change in DEMAND versus change in QUANTITY DEMANDED The law of supply • producers will offer more of a product at high prices than they will at low prices The supply curve shows the relationship between • price and quantity supplied Determinants of Supply • • • • • Change in resource prices Change in technology Change in prices of other goods Change in producer expectations Change in the number of suppliers Price Floor • Rationale • Impact • result Price Ceiling • Rationale • Impact • result