Chapter 4

• What happens to the price of orange juice when a cold snap hits Florida?


  The price of orange juice rises in supermarkets throughout the country.
• What occurs to hotel room prices in the Caribbean during warm weather in New England?


  The price of hotel rooms in the Caribbean plummets.
• How does a war in the Middle East affect gasoline prices in the United States?


  The price of gasoline in the United States rises.
• What happens to the price of a used Cadillac when a war breaks out in the Middle East?


  The price of a used Cadillac falls.
• What do the events described in the study material illustrate about economics?

  They illustrate the workings of supply and demand.
• Why are supply and demand considered fundamental in economics?


  They determine the quantity of each good produced and the price at which it is sold.
• What must one consider to understand how an event or policy will affect the economy?


  One must think about how it will affect supply and demand.
• What is the theory of supply and demand about?


  • It introduces how buyers and sellers behave.
  • It shows how supply and demand determine prices.
  • It explains how prices allocate scarce resources.
• What is a market?


  A market is a group of buyers and sellers of a particular good or service.
• How do buyers and sellers determine demand and supply in a market?


  The buyers as a group determine the demand, and the sellers as a group determine the supply.
• What are some forms that markets can take?

  Markets can be highly organized or less organized.
• How do organized markets function?


  Buyers and sellers meet at a specific time and place, knowing their prices.
• What role does an auctioneer play in organized markets?


  An auctioneer keeps order, arranges sales, and finds the price that balances buyers and sellers.
• How does the market for ice cream differ from more organized markets?


  Ice cream buyers and sellers do not meet at one time or place and are in different locations.
• What is a competitive market?


  A competitive market is one where many buyers and sellers exist, each having a negligible impact on the market price.
• What is the impact of competition on price and quantity in a market?


  Price and quantity are determined by all buyers and sellers interacting in the marketplace.
• What are the characteristics of a perfectly competitive market?


  All goods offered are exactly the same, and there are many buyers and sellers.
• What does it mean for buyers and sellers to be price takers?


  It means they must accept the price determined by market conditions.
• What is a monopoly?


  A monopoly is a market with only one seller who sets the price.
• Why is assuming perfect competition useful in economics?


  It simplifies analysis and applies to many real-world markets.
• What is the quantity demanded?


  The quantity demanded is the amount of a good that buyers are willing and able to purchase.
• What is the law of demand?


  The law of demand states that when the price of a good rises, the quantity demanded falls, and vice versa.
• What is a demand schedule?


  A demand schedule is a table that shows the relationship between the price of a good and the quantity demanded.
• What is a demand curve?


  A demand curve is a graph of the relationship between the price of a good and the quantity demanded.
• Why does the demand curve slope downward?


  The demand curve slopes downward because a lower price means a greater quantity demanded.
• How is market demand determined?


  Market demand is the sum of all individual demands for a particular good or service.
• How do you find the market demand curve from individual demand curves?


  You sum the individual demand curves horizontally to obtain the market demand curve.
• What causes shifts in the demand curve?


  Shifts in the demand curve occur when something alters the quantity demanded at any given price.
• What would happen to the demand curve if it was discovered that ice cream promotes health?


  The demand curve for ice cream would shift to the right, indicating an increase in demand.
• What is the relationship between market demand and individual demand?


  • Market demand is the sum of all individual demands.
  • Individual demand reflects one buyer's willingness to purchase.
  • Market demand reflects the total quantity demanded at each price.
• What is the significance of the demand curve in market analysis?


  • Illustrates how quantity demanded changes with price.
  • Helps in understanding consumer behavior.
  • Aids in predicting market trends.
• What happens to the demand curve when the quantity demanded at any given price changes?


  The demand curve shifts.
• If the American Medical Association discovers that ice cream consumption leads to a longer life, what would happen to the demand for ice cream?


  The demand for ice cream would increase.
• How is market demand calculated?


  • Market demand is the sum of the quantities demanded by all buyers at each price.
  • It is found by adding individual demand curves horizontally.
• At a price of $4, how many ice-cream cones does Catherine demand?


  Catherine demands 4 ice-cream cones.
• At a price of $4, how many ice-cream cones does Nicholas demand?


  Nicholas demands 3 ice-cream cones.
• What is the total quantity demanded in the market at a price of $4?


  The total quantity demanded is 7 cones.
• What are the effects of an increase in demand on the demand curve?


  • An increase in demand shifts the demand curve to the right.
  • It indicates a higher quantity demanded at every price.
• What is a normal good?


  A normal good is one where demand increases as income increases.
• What is an inferior good?


  An inferior good is one where demand increases as income decreases.