chapter 2

Question 1

A market is

Answer 1

a group of buyers and sellers of a particular good or service.

Question 2

A competitive market is a market with the following characteristics:

Answer 2

• There are many buyers and sellers.
• Individual buyers and sellers are price-takers. The market determines the price.
• There is freedom of entry and exit to and from the market.
• The goods offered for sale are all the same (homogeneous products).
• Buyers and sellers act independently and out of self-interest.

Question 3

The quantity demanded of a good.

Answer 3

is the amount that buyers are willing and

able to purchase at a particular price

Question 4

The individual demand is

Answer 4

the quantity demanded by one individual or organisation.

Question 5

The market demand is

Answer 5

the sum of the quantities demanded by all buyers.

Question 6

The law of demand:.

Answer 6

The quantity demanded of a good falls when the price of the good rises.

Question 7

A demand schedule shows

Answer 7

the relationship between the price of a good and the quantity demanded.

Question 8

The demand curve is

Answer 8

a graph of the relationship between the price of a good and the quantity demanded, all other factors being equal.

Question 9

A change in the price results

Answer 9

in a movement along the demand curve.

Question 10

Income effect:

Answer 10

A fall in the price means that consumers can buy more of the good given their income

Question 11

Subsitution effect:

Answer 11

A fall in the price causes consumers to subsitute other goods with the now cheaper good.

Question 12

market demand is

Answer 12

the sum of all the individual demands for a particular good or service.

Question 13

Substitutes:

Answer 13

Two goods (A and B) for which an increase in the price of one good leads to an increase in the demand for the other.

Question 14

Complements:

Answer 14

Two goods (A and C) for which an increase in the price of one good leads to a decrease in the demand for the other

Question 15

Normal good:

Answer 15

a good for which an increase in income leads to an increase in demand

Question 16

Inferior good:

Answer 16

a good for which an increase in income leads to a decrease in demand

Question 17

Giffen goods (A special case of inferior goods)

Answer 17

• A good that is so strongly inferior that an increase in its price results in an
increase in the quantity demanded (violation of the law of demand)

Question 18

The quantity supplied of a good or service reflects

Answer 18

the willingness to sell. It is the amount that sellers are willing and able to sell at a particular price.

Question 19

The individual supply is

Answer 19

the quantity supplied by one firm.

Question 20

The market supply is

Answer 20

the sum of the quantities supplied by all firms.

Question 21

The law of supply:

Answer 21

The quantity supplied of a good rises when the price of a good rises.

Question 22

A supply schedule shows

Answer 22

the relationship between the price of a good and the quantity supplied.

Question 23

supply curve shows

Answer 23

how much producers offer at any given price, holding constant all other factors that may influence producer’s decisions about how much to sell

Question 24

market supply is

Answer 24

the sum of the supply of all sellers.

Question 25

When the price of one or more inputs rises (labor, energy, raw materials,…),

Answer 25

the costs of production increase.

Question 26

An equilibrium is

Answer 26

a situation in which the price has reached the level where quantity supplied equals quantity demanded
(Qsi = Qdi).

Question 27

The equilibrium price P∗

Answer 27

is the price where the quantity demanded is the

same as the quantity supplied.

Question 28

The equilibrium quantity Q∗

Answer 28

is the quantity bought and sold at the

equilibrium price

Question 29

The law of supply and demand

Answer 29

• In perfectly competitive markets, the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

Question 30

A shortage is

Answer 30

a situation in which the quantity demanded is greater than the quantity supplied at the going market price. The willingness to pay is greater than the market price.

Question 31

A surplus is

Answer 31

a situation in which the quantity supplied is greater than the quantity demanded at the going market price.

Question 32

Comparative statics is

Answer 32

the comparison of economic outcomes before and after some economic variable is changed.

Question 33

Diminishing marginal benefits:

Answer 33

as you consume more of a good, your willingness to pay for an additional unit declines.