Chapter 2: Microeconomics

Question 1

What is a market?

Answer 1

All those buyers and sellers who influence the price of a particular good or service

Question 2

What are the conditions for a market to exist?

Answer 2

• There must be at least one potential buyer and one potential seller of a good or service
• Sellers must have a good/service that they are willing to sell
• Buyers must have the means to purchase the goods/services
• Terms of exchange must be agreed on
• Transaction should be formalised

Question 3

What determines which goods or services consumers buy and how much they are prepared to pay for them?

Answer 3

Value
Utility
Price

Question 4

What does the concept of value prove?

Answer 4

• Expressed by the amount of money willing to be sacrificed
• measured in terms of monetary units
• determined by satisfaction

Question 5

What does the concept of utility prove?

Answer 5

• The more benefit consumer finds in consumption, the greater the satisfaction
• Utility is subjective and differs from person to person

Question 6

What does the concept of price prove?

Answer 6

• Defined by the amount requested or offered to obtain a good/service
• We assume price is equal to value
• people are not forced to buy
• If they don’t buy demand drops, if they buy supply is sustained or increased

Question 7

What is total utility?

Answer 7

The total benefit or satisfaction that a consumer derives from consuming a good or service

Question 8

How do consumers spend their money?

Answer 8

In a way that will maximize the total utility they derive

Question 9

What are markets composed of?

Answer 9

• Buyers and sellers
• product and factor markets
• generic markets

Question 10

Explain the composition of buyers and sellers

Answer 10

• Buyers as a group determine the demand and sellers as a group determine the supply
• Markets are established by interactions between buyers and sellers
• These interactions can be direct or indirect

Question 11

Explain the product and factor markets

Answer 11

• Markets for goods and services are called product/goods markets, for factors they are called factor markets
• the demand for the services of factors is derived from demand for products produced by these services

Question 12

Explain generic markets

Answer 12

• There are world generic markets for wheat, maize coffee etc.
• Each of the markets are interlinked but are also separate
• Like Russian dolls

Question 13

What are the different forms of markets?

Answer 13

Perfect and imperfect markets

Question 14

What are the four characteristics by which a market can be identified?

Answer 14

• The number of producers
• The nature of the product
• Barriers to entry
• Availability of information

Question 15

What is a perfect market?

Answer 15

A market where no supplier is able to manipulate the price

Question 16

Why can’t the supplier manipulate prices in a perfect market?

Answer 16

• There are many suppliers
• Products are produced by different suppliers and are homogeneous
• There are no barriers to entry, suppliers can enter or exit the market freely
• Complete information is available to producers and consumers about market conditions

Question 17

Why are suppliers to perfect markets called price-takers?

Answer 17

They operate under condition of perfect markets and cannot manipulate prices of their goods/services

Question 18

What are imperfect markets?

Answer 18

• Monopoly and oligopoly markets are part of imperfect markets
• prices are determined one-sidedly

Question 19

Why are prices determined one sidedly in an imperfect market?

Answer 19

• There is only one large supplier of a good or service in a monopoly, only a few large suppliers in oligopoly
• The good or service supplied is unique and has no close substitutes
• Entry into the market is restricted so that new suppliers cannot enter the market
• Producers and consumers have incomplete knowledge about market conditions

Question 20

What is a third kind of imperfect market?

Answer 20

monopolistic competition

Question 21

Why are monopolistic suppliers referred to as price makers?

Answer 21

They have complete control over prices they charge

Question 22

Why has the concept of a market been applied to the world recently?

Answer 22

Because of the advancements of electronics

Question 23

What has the effect of electronics resulted in?

Answer 23

• It molded the world into a single economic village
• A price change in one part of the world affects price change in the rest of the world
• Goods purchased and delivered come from nearest section on globe
• A product can be forwarded and delivered in different ways

Question 24

What are futures?!

Answer 24

the prices of goods that are still to be produced

Question 25

What are the 5 conditions for goods to be suitable for trade in the world

Answer 25

• There must be a wide demand
• It must be transportable
• The cost of transport must be small in relation to the value of the good
• It must be durable
• Entry must not be restricted

Question 26

What is the purpose of price?

Answer 26

It serves to calibrate demand and supply of a good or service

Question 27

What is the purpose of demand?

Answer 27

It starts the economic process

Question 28

What is demand?

Answer 28

The quantity of a good or service that consumers are willing and able to purchase over a given period of time

Question 29

What are the determinants of demand?

Answer 29

• The price of the good
• The consumers’ level of income
• Tastes
• Other factors
• The prices of other goods and services

Question 30

What is a substitute good?

Answer 30

A good that can be used in place of another good to satisfy a want

Question 31

What is a complementary good?

Answer 31

A good that is consumed together with another good to satisfy a want

Question 32

What is known as the ceteris paribus assumption?

Answer 32

In order to analyse the impact of price on demand, we make the simplifying assumption that all other things remain the same