Chapter 8 Study Guide Name:______________________Period:________ Section 1: You Should Be Able To: 1. Describe how the principle of voluntary exchange operates in a market economy. 2. Explain how diminishing marginal utility, the real income effect, and the substitution effect relate to the law of demand. Key Terms: Voluntary Exchange: Law of Demand: Utility: Law of Diminishing Marginal Utility: Real Income Effect: Substitution Effect: Key Concepts: How does the principle of voluntary exchange operate in a market economy? How do diminishing marginal utility, the real income effect, and the substitution effect influence the quantity demanded for a given product or service? Section 2: You should be able to: 1. Explain what you can learn by graphing the demand curve 2. Describe how the price elasticity of demand affects how much the price for a given product can vary. 3. Discuss the determinants of demand. Key Terms: Demand Curve: Elasticity: Price Elasticity of Demand: Elastic Demand: Inelastic Demand: Complementary Good: Key Concepts: What does graphing the demand curve show you about the relationship between price and quantity demanded? What is the difference between a good that has elastic demand and one that has inelastic demand? What are the determinants of demand? Section 3: You Should Be Able To: 1. Explain how the incentive of greater profit affects supply. 2. Describe the relationships that the supply curve shows. Key Terms: Law of Supply: Law of Diminishing Returns: Supply Curve: Key Concepts: How does the incentive of greater profit affect the supply of a given good or service? What does the supply curve show? Section 4: You Should Be Able To: 1. 2. 3. 4. 5. List the four determinants of supply and describe how they change supply. Explain how the equilibrium price is determined. Explain how shortages and surpluses affect price. Describe how shifts in equilibrium price occur. Discuss how the forces underlying supply and demand affect prices. Key Terms: Equilibrium Price: Technology: Shortages: Surpluses: Key Concepts: What are the determinants of supply? When one of these determinants changes, what happens to the supply curve? How do shortages and surpluses affect price? In what ways do shifts in equilibrium price occur? How do the forces underlying supply and demand affect prices?