Chapter 2 (the market forces supply and demand)

Question 1

Competitive market:

Answer 1

Competitive market:
o Many buyers and sellers, they act independently and out of self-interest, and they are price-takers (they take the prices
as they are, can’t change them, the market does)

o There is a freedom of entry and exit to and from the market

o The goods for sale are all the same (homogeneous products), e.g.: the market for milk

Question 2

Monopoly:

Oligopoly:

Monopolistic competition:

Answer 2

Monopoly: market with only one seller

Oligopoly: market with only a few sellers

Monopolistic competition: market with many sellers (and slightly ≠ products)

Question 3

Law of demand = ?

Answer 3

Law of demand = the QD of a good falls when the price of a good rises

Question 4

Income effect:

Substitution:

Answer 4

Income effect: a fall in the price means that consumers can buy more of the good given their income

Substitution: a fall in the price causes consumers to substitute other goods with the now cheaper good.

Question 5

Substitutes:

Complements: .

Answer 5

Substitutes: Two goods (A and B) for which an increase in the P
of one good lead to an increase in the QD for the other: coffee and tea; Pepsi and Coca-Cola.

Complements: Two goods (A and C) for which an increase in the P of one good leads to a decrease in the QD for the other: diesel and diesel cars, computers and software, coffee and sugar.

Question 6

Normal good:

Answer 6

Normal good: a good for which an increase in income → an increase in demand

Question 7

Inferior good:

Answer 7

Inferior good: a good for which an increase in income → a decrease in demand (bus rides, instant noodles) :

Question 8

Giffen goods:

Answer 8

Giffen goods: so strongly inferior that price increase → QD increase (violation of the law of demand) : they are usually
for poor consumers and have few substitutes (poor consumers do not find adequate substitutes, a P increase diminishes
possibilities of buying other goods, so poor consumers are forced to buy more (rice in poor Chinese regions)

Question 9

Law of supply:

Answer 9

Law of supply: QS of a good rises when its price rises too (price increase = more profitable → QS increasing)

Question 10

Technological progress increases -> Cost of production?

Price of one or more inputs rises -> Cost of production?

Answer 10

Technological progress increase productivity because more
can be produced with given inputs => Costs of Production
(CoP) decreases.
 Price of one or more inputs rises (labour, energy, raw
materials, …) => CoP increase. At the given market price, it
becomes less profitable to produce.

Question 11

shortage - ?
surplus - ?

Answer 11

Shortage is a situation in which the QD is greater than the QS at the going market price. The willingness to pay is greater than the market price.

Surplus is a situation in which the QS is greater than the QD at the going market price