Chapter 2

Question 1

markets

Answer 1

• interaction between buyers and sellers
• price is discovered in the interactions of buyers and sellers

Question 2

Markets can be:

Answer 2

-local
-national
- international

Question 3

Law of demand

Answer 3

• negative or inverse relationship between price and quantity demanded
• other things equal

Question 4

reasons for law of demand

Answer 4

• law of diminishing marginal utility
• income effect and subsitutionn effect

Question 5

demand

Answer 5

curve that shows various amounts of a product that consumers are willing to buy at certain prices, during a certain time period

Question 6

three explanations for law of demand

Answer 6

• common sense (ppl will buy more of a product at a lower cost
• at specific time period people will derive less satisfaction from each unit consumed (diminishing marginal utility
• income and substitution effects (lower price allows for a person to purchase more)

Question 7

demand curve

Answer 7

• inverse relationship between price and quantity demanded
• quantity demanded on horizontal, price on vertical
• downward slope

Question 8

determinants of demand

Answer 8

• change in taste
• change in number of buyers
• chnage in income (normal goods, inferior goods)
• change in price of related goods (complements, substitutes)
• chnage in consumers expectations (future prices, future income)

Question 9

Normal goods vs inferior goods

Answer 9

does not relate to quality
- macoroni is inferior, steak is normal
- value village vs designer
IF INCOME INCREASES, NORMAL GOODS WILL INCREASE

Question 9

Normal goods vs inferior goods

Answer 9

does not relate to quality
- macoroni is inferior, steak is normal
- value village vs designer
IF INCOME INCREASES, NORMAL GOODS WILL INCREASE

Question 10

A change in demand will do what to the graph

Answer 10

shift in the entire demand curve

Question 11

change in quantity demanded will do what to the graph

Answer 11

• movement along the demand curve

Question 12

Law of supply

Answer 12

• other things equal, as the price rises, the quantity rises

Question 13

reasons for law of supply

Answer 13

• prace acts as an incentive to producers
• at some point the cost will rise (digging coal, they have to go deeper and deeper, eventually costing more to produce)

Question 14

determinants of supply

Answer 14

• factor prices
• tech
• taxes and subsidies
• price of other goods
• price expectations
• number of sellers

Question 15

market equilibrium

Answer 15

• when demand curve and supply curve intersect
• surplus and shortage
• rationing function of prices
• efficient allocation (productive efficiency, allocative efficiency)

Question 16

Efficient allocation

Answer 16

• production efficiency
• producing goods in the lease costly way
• using best tech
• using the right mix of resources

Question 17

allocative efficiency

Answer 17

producing the right mix of goods
- combination of goods most highly valued by society

Question 18

rationing function of prices

Answer 18

• ability of the competitive forces of demand and supply to establish a price at whic selling and buying decisions are consistent

Question 19

Changes in demand and supply and the effects on price and quanitity

Answer 19

D increases: P increases, Q increases
D decreases: P decreases, Q decreases

Question 20

changes in demand and supply and effects on price and. quantity

Answer 20

S increases: P decreases, Q increases
S decreases: P increases, Q decreases

Question 21

complex case: supply increase, demand increase

Answer 21

equilibrium price would decrease, equilibrium quantity is indeterminate

Question 22

price ceilings

Answer 22

government set pricing
- maximum legal price a seller may charge for a product or service
- set below equilibrium price
-rationing problem
-black markets
- credit card interest ceilings