Chapter 2: Basic Concepts from Economics

Question 1

The market is an opportunity for buyers and sellers to

Answer 1

• Compare prices
• estimate demand
• estimate supply

➡️Achieve an equilibrium between supply and demand

Question 2

Elasticity of the demand: high elasticity

Answer 2

• non-essential good

- easy substitution

Question 3

Elasticity of the demand: low elasticity

Answer 3

• essential good
• no substitutes

➡️electrical energy has a very low elasticity in the short term

Question 4

Supply side: how many widgets shall I produce?

Answer 4

• Goal: Make a profit on each widget sold

- Produce one more widget if and only if the cost of the producing it is less than the market price

Question 5

Supply side

Answer 5

• Needs to know the cost of producing the next widget
• Considers only the variable costs
• Ignores the fixed costs: invests in productions plants and machines

Question 6

Bilateral transactions

Answer 6

• Produces and consumers trade directly and independently
• Consumers shop around for the best deal
• Produces check the competitions prices
• And efficient market discovers the equilibrium price

Question 7

What makes the market efficient?

Answer 7

• All buyers and sellers have access to sufficient information about prices, supply and demand
• Factors favouring an efficient market: 1) the number of participants 2) standard definition of commodities 3) good information exchange mechanisms

Question 8

Examples: efficient markets

Answer 8

• Open air food market

- Chicago mercantile exchange

Question 9

Examples: inefficient markets

Answer 9

Used cars

Question 10

Social or global welfare

Answer 10

Consumers surplus + suppliers profit = social or global welfare

Question 11

Market equilibrium: summary

Answer 11

Price equals

1) Marginal revenue of supplier
2) Marginal cost of supplier
3) Marginal cost of consumer
4) Marginal utility of consumer

Question 12

Time varying prices

Answer 12

• Market price varies with offer and demand
• in theory, there should never be a shortage
• encourages efficient use of resources

Question 13

Market price varies with offer in demand: if demand increases…

Answer 13

• Price increases beyond utility for some consumers

- Market settles at a new equilibrium

Question 14

Market price service with often demand: if demand decreases…

Answer 14

• Price decreases
• Some producers leave the market
• Market settles at a new equilibrium

Question 15

Time varying prices versus fixed prices

Answer 15

• Assume fixed price equals average of market price
• Period of high demand: fixed price is smaller than marginal utility and marginal cost, consumers continue buying the commodity rather than switch to another commodity
• Period of low demand: fixed price is higher than marginal utility and marginal cost, consumers do not switch from other commodities
• Inefficient allocation of resources