Ch. 2 & 3: Institutions and the Marketplace, Demand Flashcards
What are some things markets do?
They create wealth, make it possible for people to specialize, and facilitate trade
what are some types of markets?
Formal markets (think NYSE) and informal markets (think garage sales)
Define a property right?
The right to use a good, service or resource as you wish
Property rights make…?
markets possible, and specialization and trade possible
What do property rights do for owners?
Given them strong incentives to consider all the benefits and costs of the resources they own are used
What are the different types of property ?
Private property (owned by individuals), common property (owned by groups of people) and public property (owned by the govt)
What is the Rule of Law?
A system where society enforces property rights, contacts, and other rules according to an established and uniform set of laws and judicial system instead of arbitrary decisions
What is the rule of force?
The strong enforce the rules according to their will. If you can force others to do what you want, you can make the rules.
What is the rule of men?
A system where the rules are enforced by the good will of the enforcer, such as a monarch or ruling group (like a royal family)
What do the rule of force and rule of men have in common?
Both increase uncertainty, risk, and limit market development (thus limiting specialization and trade)
How does the rule of law improve upon rules of force and men?
It makes laws known and the legal system is predictable, lowers the risks. This increases specialization and trade, which increases wealth.
What are the basic characteristics of competitive markets?
Many buyers and sellers, free entry and exit, internalize all the benefits and costs of production
Competitive markets result in what?
Result in optimal levels of exchange, which maximizes the gains from trade
What is an externality?
The benefit enjoyed by or the cost imposed on a third party not directly involved in the production or consumption of a good or service
What is market power?
The ability to influence the price of a good/service by changing the quantity produced.
What is one crucial benefit of competitive markets to consumers?
low prices
What does it mean for a market to become more concentrated?
It becomes less competitive and a sign that higher prices are coming in the future
Why is more concentration occurring over the years?
Smaller firms are less equipped to handle regulations, which grew significantly in the last 40 years. Large firms see increases in productivity as tech advances. But decreasing regulation may help level the playing field and encourage competition.
Why do buyers benefit from specialization and trade?
BC they have access to more goods and services at a lower price
Why do sellers benefit from specialization and trade?
They can make a profit and have income to buy things
Profit is a _______, competition is the _______
motivator, regulator
Define an entrepreneur?
A person who organizes resources like land, labor and capital to develop a new product or method of production, and assumes the risk of bringing it to market.
What is the economical definition of a market?
A group of buyers and sellers who exchange one specific good, service or resource
What is the law of demand?
A principle that states that as the price of a good, service or resource rises, the quantity demanded will decrease, and vice versa, all else held constant.
Give an example of the law of demand
If you lower the price of a cup of lemonade, the law of demand tells you that people will be more willing and able to buy a cup of lemonade and quantity demanded will increase
What is demand schedule?
A tabular (table) representation of the relationship between the price of a good, service or resource and the quantities consumers are willing and able to buy over a fixed time period
What is a demand curve?
A graphical representation of the relationship between the price of a good, resource or service and the quantities consumers are willing and able to buy over a fixed time period, all else held constant
Define quantity demanded?
The quantity of a good, service, or resource that consumers are willing and able to buy at a given price.
What does the all else held constant assumption do?
Makes it possible to study demand curves and how a change in price affects quantity demanded. A change in an all else held constant variable changes the entire relationship between price and quantity demanded.
Why does demand always slope down?
The law of demand says that lower prices lead to a higher quantity demanded, so the demand curve should always slope down. DEMAND SLOPES DOWN
On the graph axes, where down price and quantity go?
Price goes on the vertical and quantity on the horizontal
When the relationship between between price and quantity demanded what is it called?
A demand curve?
What relationship do demand curves illustrate?
The relationship between the opportunity cost or price of an action and the quantity of an action ppl will undertake. Thus, if ppl want to do more of an activity, we have to find a way of lowering the opportunity cost (price) of that activity. The opposite is true also: if opportunity cost (price) rises, less will be done
What are some reasons to explain that as the price of a good rises, the quantity demanded will fall? (why demand curves are downward sloping)?
The income effect, the substitution effect and diminishing marginal utility.
Prices influence what?
The purchasing power of income
Define the income effect?
The effect that a change in the price of a good, service or resource has on the purchasing power of income. When prices decrease, the purchasing power of income increases and consumers are able to purchase more goods, services or resources.
Give an example of the income effect?
If you have $20 to spend on gas each week, and the price of gas doubles from $2 to $4, the purchasing power of $20 falls from 10 to 5 gallons. The resulting decrease in the quantity of gasoline demanded is due to the income effect.
Define substitution effect?
The effect that a change in the price of one good, service, or resource has on the demand for another. For example. the increase in the price of one good will increase the demand for its substitutes and vice versa
Give an example of the substitution effect?
Victor usually eats either oranges or apples with his lunch. When he sees the price of oranges go up, he substitutes them with apples.
Define diminishing marginal utility?
The negative relationship between the quantity of a good, service or resource and the marginal utility obtained fro, each additional unit consumed in a given period of time.
Give an example of diminishing marginal utility?
For Monica, the first cup of coffee in the morning is worth $3, the second is worth $1. So if the price of coffee is $2/cup, she buys one cup of coffee. Her first cup gives her a lot of satisfaction and is worth the price. But dhe doesn’t buy a secnd cup bc of diminishing marginal utility. The second cup is only worth $1 to her, so she can’t justify paying $2.
The income effect refers to what?
The effect that a change in price of a good/service has on the purchasing power of a person’s income.
Define market demand?
The overall, or total, demand for good/service. it represents the horizontal summation of the quantities demanded by individuals firms, states or even nation at each price over a fixed time period, all else held constant.
Explain demand
we are referring to the quantity that consumers are willing and able to buy at a variety of prices, not just today but also how many they are willing and able to buy if the prices changed.
Explain demand schedule
displays the demand in a table
Why is the size of a market important?
It tells you what will affect demand
If a non price determinant changes, what shifts?
the demand curve, can cause an increase in demand (rightward shift) or a decrease in demand (leftward shift)
Describe a shift in demand?
A change in the quantity of a good or service, at every price
Describe movement along a demand curve?
A change in the quantity of a good or service demanded due to a change in its price. This change is represented as a movement along an existing demand curve.
Demand curve focuses entirely on ______.
price
What’s the difference between a parallel and non parallel shift in the demand curve?
Parallel shifts occur when the quantities demanded change by a given amount (25 tons of x good at a given price), whereas non parallel shifts occur when quantities demanded is decreased by a given percentage at each price (say 50%)
What is the difference between normal and inferior goods?
When income increases, so do sales, and vice versa. whereas with inferior goods as income increases demand decreases and vice versa.
What is one reason demand curves slope down?
Income effect, when prices fall, the purchasing power of your income increases, allowing you to purchase more goods and services. However, the income effect is not to be confused with a change in income.
What is the difference between changes in demand and quantity demanded?
If the price of something is decreased, there will be an increase in the quantity demanded (movement along the demand curve) and we would say there was an increase in the quantity demanded. If more of the good was bought because of an increase in income, this would be represented by a shift of the entire demand curve to the right, and we would say there was an increase in demand.
So a change in price, all else held constant, generates a change in…?
quantity demanded, not a change in demand. A change in demand occurs when a nonprice determinant changes, which shifts the entire demand curve to the right or left.
Define substitutes?
Goods/services that are viewed as replacements for one another
Define complements
Goods/service that are used of consumed with one another
