1.1 Competitive markets

Question 1

What is a market?

Answer 1

Any kind of arrangement where buyers and sellers of goods, services or resources are linked together to carry out an exchange.

Question 2

What is demand in microeconomics?

Answer 2

The various quantities of a good (or service) the consumer is willing and able to buy at different possible prices during a particular time period, ceteris paribus.

Question 3

What is the law of demand?

Answer 3

There is a negative causal relationship between the price of a good and its quantity demanded over a particular time period, ceteris paribus.

Question 4

What is utility?

Answer 4

Benefit/satisfaction provided by the good or service received.

Question 5

What is the marginal utility/benefit theory for demand?

Answer 5

For each successive quantity of a good bought, the amount of benefit you get for that extra quantity (marginal benefit) decreases, so you are less willing to pay such a high price, therefore, the demand is negatively sloped.

Question 6

What is market demand?

Answer 6

The sum of all individual demands for a good.

Question 7

What causes:

1. movements along the demand curve?
2. shifts of the demand curve?

Answer 7

1. Changes in price
2. Changes in non-price determinants

Question 8

What are some six non-price determinants of market demand?

Answer 8

1. Income in the case of normal goods
2. Income in the case of inferior goods
3. Preferences and tastes
4. Prices of substitute goods
5. Prices of complementary goods
6. Demographic and population changes

Question 9

What is supply in microeconomics?

Answer 9

Supply indicates the various quantities of a good (or service) a firm is willing and able to produce and supply to the market for sale at different possible prices, during a time period, ceteris paribus.

Question 10

What is the law of supply?

Answer 10

There is a positive causal relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus.

Question 11

What is market supply?

Answer 11

The sum of all individual firms’ supplies for a good.

Question 12

Why might a supply curve be vertical (perfectly inelastic)? (2)

Answer 12

1. There is a fixed quantity of the good supplied because there is no time to produce more of it. E.g. tickets to a theatre, no matter the price, the number that can be supplied is the same.
2. There is a fixed quantity of the good supplied because there is no possibility of ever producing more of it. E.g. antique goods.

Question 13

What causes:

1. movements along the supply curve?
2. shifts of the supply curve?

Answer 13

1. Changes in price
2. Changes in non-price determinants

Question 14

What are nine non-price determinants of market supply?

Answer 14

1. Cost of factors of production e.g. wages.
2. Technology (improvements)
3. Price of related goods: competitive supply (competition for the use of the same resources)
4. Price of related goods: joint supply (both firms using the same supply chain e.g. butter and cheese producers both use milk)
5. Producer (firm) expectations and planning
6. Taxes
7. Subsidies
8. The number of firms
9. “Shocks” or sudden unpredictable events

Question 15

What is the market equilibrium point?

Where are shortages and where are surpluses?

Answer 15

Market equilibrium: when demand crosses supply.

Shortages: below the equilibrium point.

Surplus: above the equilibrium point.

Question 16

How does market equilibrium link to scarcity and choice?

Answer 16

The condition of scarcity forces societies to make choices about the “what to produce?” economic question, which is resource allocation. Choices involve an opportunity cost, but if operating at market equilibrium, the opportunity cost is minimised (for the quantity that should be produced.

Question 17

How do prices link to the allocation of resources?

Answer 17

Prices act as signals and incentives. As signals, prices communicate information to decision-makers. As incentives, prices motivate decision-makers to actually respond to this information.

Question 18

What is consumer surplus and where is it on a supply-demand diagram?

Answer 18

Consumer surplus is the highest price consumers are willing to pay for a good minus the price actually paid for it.

This is the area below the demand curve from the point where the demand curve intersects the y-axis and the point on the demand curve at the price and quantity the market is operating at.

Question 19

What is producer surplus and where is it on a supply-demand diagram?

Answer 19

Producer surplus is the price received by firms for selling their good minus the lowest price that they were willing to accept to produce the good.

This is the area above the supply curve from the point where the supply curve intersects the y-axis and the point on the supply curve at the price and quantity the market is operating at.

Question 20

What is social surplus and when is it maximised?

Answer 20

Social surplus is the sum of the consumer and producer surpluses and is maximised when at the equilibrium point.

It represents the total gain for being at that price and quantity combination and can show allocative efficiency at the equilibrium point (as it is maximum)