Ch. 2 & 3: Institutions and the Marketplace, Demand

Question 1

What are some things markets do?

Answer 1

They create wealth, make it possible for people to specialize, and facilitate trade

Question 2

what are some types of markets?

Answer 2

Formal markets (think NYSE) and informal markets (think garage sales)

Question 3

Define a property right?

Answer 3

The right to use a good, service or resource as you wish

Question 4

Property rights make…?

Answer 4

markets possible, and specialization and trade possible

Question 5

What do property rights do for owners?

Answer 5

Given them strong incentives to consider all the benefits and costs of the resources they own are used

Question 6

What are the different types of property ?

Answer 6

Private property (owned by individuals), common property (owned by groups of people) and public property (owned by the govt)

Question 7

What is the Rule of Law?

Answer 7

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

Question 8

What is the rule of force?

Answer 8

The strong enforce the rules according to their will. If you can force others to do what you want, you can make the rules.

Question 9

What is the rule of men?

Answer 9

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)

Question 10

What do the rule of force and rule of men have in common?

Answer 10

Both increase uncertainty, risk, and limit market development (thus limiting specialization and trade)

Question 11

How does the rule of law improve upon rules of force and men?

Answer 11

It makes laws known and the legal system is predictable, lowers the risks. This increases specialization and trade, which increases wealth.

Question 12

What are the basic characteristics of competitive markets?

Answer 12

Many buyers and sellers, free entry and exit, internalize all the benefits and costs of production

Question 13

Competitive markets result in what?

Answer 13

Result in optimal levels of exchange, which maximizes the gains from trade

Question 14

What is an externality?

Answer 14

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

Question 15

What is market power?

Answer 15

The ability to influence the price of a good/service by changing the quantity produced.

Question 16

What is one crucial benefit of competitive markets to consumers?

Answer 16

low prices

Question 17

What does it mean for a market to become more concentrated?

Answer 17

It becomes less competitive and a sign that higher prices are coming in the future

Question 18

Why is more concentration occurring over the years?

Answer 18

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.

Question 19

Why do buyers benefit from specialization and trade?

Answer 19

BC they have access to more goods and services at a lower price

Question 20

Why do sellers benefit from specialization and trade?

Answer 20

They can make a profit and have income to buy things

Question 21

Profit is a _______, competition is the _______

Answer 21

motivator, regulator

Question 22

Define an entrepreneur?

Answer 22

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.

Question 23

What is the economical definition of a market?

Answer 23

A group of buyers and sellers who exchange one specific good, service or resource

Question 24

What is the law of demand?

Answer 24

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.

Question 25

Give an example of the law of demand

Answer 25

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

Question 26

What is demand schedule?

Answer 26

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

Question 27

What is a demand curve?

Answer 27

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

Question 28

Define quantity demanded?

Answer 28

The quantity of a good, service, or resource that consumers are willing and able to buy at a given price.

Question 29

What does the all else held constant assumption do?

Answer 29

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.

Question 30

Why does demand always slope down?

Answer 30

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

Question 31

On the graph axes, where down price and quantity go?

Answer 31

Price goes on the vertical and quantity on the horizontal

Question 32

When the relationship between between price and quantity demanded what is it called?

Answer 32

A demand curve?

Question 33

What relationship do demand curves illustrate?

Answer 33

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

Question 34

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)?

Answer 34

The income effect, the substitution effect and diminishing marginal utility.

Question 35

Prices influence what?

Answer 35

The purchasing power of income

Question 36

Define the income effect?

Answer 36

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.

Question 37

Give an example of the income effect?

Answer 37

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.

Question 38

Define substitution effect?

Answer 38

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

Question 39

Give an example of the substitution effect?

Answer 39

Victor usually eats either oranges or apples with his lunch. When he sees the price of oranges go up, he substitutes them with apples.

Question 40

Define diminishing marginal utility?

Answer 40

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.

Question 41

Give an example of diminishing marginal utility?

Answer 41

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.

Question 42

The income effect refers to what?

Answer 42

The effect that a change in price of a good/service has on the purchasing power of a person’s income.

Question 43

Define market demand?

Answer 43

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.

Question 44

Explain demand

Answer 44

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.

Question 45

Explain demand schedule

Answer 45

displays the demand in a table

Question 46

Why is the size of a market important?

Answer 46

It tells you what will affect demand

Question 47

If a non price determinant changes, what shifts?

Answer 47

the demand curve, can cause an increase in demand (rightward shift) or a decrease in demand (leftward shift)

Question 48

Describe a shift in demand?

Answer 48

A change in the quantity of a good or service, at every price

Question 49

Describe movement along a demand curve?

Answer 49

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.

Question 50

Demand curve focuses entirely on ______.

Answer 50

price

Question 51

What’s the difference between a parallel and non parallel shift in the demand curve?

Answer 51

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%)

Question 52

What is the difference between normal and inferior goods?

Answer 52

When income increases, so do sales, and vice versa. whereas with inferior goods as income increases demand decreases and vice versa.

Question 53

What is one reason demand curves slope down?

Answer 53

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.

Question 54

What is the difference between changes in demand and quantity demanded?

Answer 54

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.

Question 55

So a change in price, all else held constant, generates a change in…?

Answer 55

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.

Question 56

Define substitutes?

Answer 56

Goods/services that are viewed as replacements for one another

Question 57

Define complements

Answer 57

Goods/service that are used of consumed with one another