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Test Answers on Chapter 3 Study Guide

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Demand
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Consumer willingness and ability to buy products
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Supply
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How much of a good or service a producer is willing and able to produce at different prices.
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Demand Schedule
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A table that shows the relationship between the price of a good and the quantity demanded
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Supply Schedule
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A table that shows the relationship between the price of a good and the quantity supplied
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Law of Demand
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consumers buy more of a good when its price decreases and less when its price increases
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Law of Supply
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As a price increases the quantity of the good provided increases, as the price of a good decreases, the number provided decreases
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Diminishing Marginal Utility
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the principle that our additional satisfaction, or our marginal utility, tends to go down as more and more units are consumed
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Supply Curve
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A graph of the relationship between the price of a good and the quantity supplied
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Income Effect
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Indicates that a lower price increases the purchasing power of a buyer’s money income
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Determinants of Supply
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Anything other than price of the current item that influences production decisions, including cost of raw materials, cost of labor, level of technology used to produce, number of producers in the market, price of related products, and expected future price
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Substitution Effect
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Economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other
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Change in Supply
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A change in the quantity supplied of a good or service at every price; a shift of the supply curve to the left or right
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Demand Curve
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A graph of the relationship between the price of a good and the quantity demanded
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Change in Quantity Supplied
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A movement along the supply curve that occurs in response to a change in price
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Determinants of Demand
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Anything other than price of the current item that influences consumer buying decisions, including income, tastes and preferences, price of related items (substitutes and complements), number of consumers in the market, and expected future price
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Equilibrium Price
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The price at which the amount of goods producers supply meets the amount of goods consumers demand
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Normal Goods
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Goods for which demand goes up when income is higher and for which demand goes down when income is lower
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Equilibrium Quantity
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The quantity supplied and the quantity demanded at the equilibrium price
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Inferior Good
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A good that consumers demand less of when their income increases
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Surplus
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A situation in which quantity supplied is greater than quantity demanded
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Substitute Good
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goods that can be used to replace the purchase of similar goods when prices rise
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Shortage
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A situation in which quantity demanded is greater than quantity supplied
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Complementary Good
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Goods that are used together, so a rise in demand for one increases the demand for the other
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Productive Efficiency
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Achieving as much output as possible from a given amount of inputs or resources
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Change in Demand
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A change in the quantity demanded of a good or service at every price; a shift of the demand curve to the left or right
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Allocative Efficiency
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A state of the economy in which production is in accordance with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to society equal to the marginal cost of producing it
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Change in Quantity Demanded
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That there is a movement along a stable demand curve as a result of a change in price
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Price Ceiling
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A legal maximum on the price at which a good can be sold
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Price Floor
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A legal minimum on the price at which a good can be sold