Chapter 3 (1)

Question 1

what is a market?

Answer 1

People do not have to be physically near each other to make an exchange.

►Examples: online retailers, Amazon.com or fruits that is grown from South America

Question 2

MARKET

Answer 2

refers to the buyers and sellers who trade a particular good or service, not to a physical location

►Markets can be located locally, globally, or even virtually.

Question 3

COMPETITIVE MARKET

Answer 3

one in which fully informed, price-taking buyers & sellers = easily trade a standardized good / service

Question 4

FOUR CHARACTERISTIC OF A PERFECTLY COMPETITIVE MARKET:

Answer 4

1. STANDARDIZED GOOD
2. FULL INFORMATION
3. NO TRANSACTION COST
4. PRICE TAKERS

Question 5

DEMAND

Answer 5

describes how much of something people = willing & able to buy under certain circumstances

Question 6

OVERALL MARKET DEMAND

Answer 6

if we add up all these individual choices: different people = buy products at different prices; at any given time, at any given price, some people are willing to buy and others = aren’t.

Question 7

QUANTITY DEMAND

Answer 7

-the amount of a particular good or service that buyers are willing and able to purchase at a given price at a specified period.

► For almost all goods, the lower the price, the higher the quantity demanded

Question 8

LAW OF DEMAND

Answer 8

this inverse relationship between price & quantity

► When all else = held equal, quantity demanded rises as price falls!

Question 9

NON-PRICE DETERMINANTS of demand

Answer 9

falling prices = not the only consideration in people’s decision to buy products.

► Incomes, expectations, and tastes all play a role.

Question 10

THE DEMAND CURVE

Answer 10

the law of demand = says that quantity of products demanded = will be different at every price level.

► for this reason, it is often useful to represent demand as a table, demand schedule.

Question 11

DEMAND SCHEDULE

Answer 11

shows the quantities of a particular good / service that consumers = willing to purchase (demand) at various prices.

► Assumes that factors other than price = will remain the same.

Question 12

DEMAND CURVE

Answer 12

visually displays the demand schedule; that is, it is a graph that shows the quantities of a particular good / service that consumers = will demand at various prices.

► Shows another way to represent demand, by drawing each price-quantity combination from the demand schedule AS A POINT ON A GRAPH

► Demand curve = also represents consumers’ willingness to buy: it shows the highest amount consumers = will pay for any given quantity.

Question 13

DETERMINANTS OF DEMAND

Answer 13

the demand curve = represents the relationship between price & quantity demanded w/ everything else held constant.

► If everything else = NOT held constant–that is, IF one of the non-price factors that determines demand = changes–the curve will shift.

Question 14

the downward-sloping curve = reflects the trade-offs that people face between:

Answer 14

1. The benefit they expect to receive from a good

2. The opportunity cost they face for buying it

Question 15

The non-price determinants of demand = can be divided into 5 major categories:

Answer 15

1. Consumer preferences
2. Prices of related goods
3. Incomes
4. Expectations
5. Number of buyers

Question 16

CONSUMER PREFERENCES

Answer 16

are the personal likes & dislikes that make buyers more / less inclined to purchase a good.

► some consumer preference = fairly constant across time (e.g., from those that arise from personality traits or cultural attitudes and beliefs).

► Fads, trends, and fashions can cause demand to change.
• When tastes shift in favor of a good, the demand curve will shift to the right;
• when a good becomes less popular, the demand curve will shift to the left

Question 17

PRICES OF RELATED GOODS

Answer 17

Some goods are related, and the change in the price of one good can affect the demand for another good.

Question 18

TWO KINDS OF RELATED GOODS

Answer 18

• Substitutes

- COMPLEMENTS

Question 19

SUBSTITUTES

Answer 19

-are goods that have many of the same uses; that a consumer = might purchase one in place of the other–example, rice & pasta.

Question 20

CLOSE SUBSTITUTES

Answer 20

if the two goods = quite similar

Example: similar fishes, such as salmon and trout

Question 21

COMPLEMENTS

Answer 21

-goods that are consumed together–so that purchasing one will make a consumer more likely to purchase the other

Examples: peanut butter and jelly, cereal and milk, cars and gasoline
►If the price of one of the other two good = increases, demand for the other = will likely decrease.

Question 22

INCOMES

Answer 22

changes in income can lead to a change in demand.

►many goods = NORMAL GOODS–meaning that an increase in income = causes an increase in demand & a decrease in income = causes a decrease in demand.
Example: cellphones are expected…

► for some goods, INFERIOR GOODS–the opposite relationship holds: as income increases, demand decreases.
• Typically people = replace inferior goods w/ more expensive & appealing substitutes when their income = rise.

Examples of inferior goods: instant noodles, some canned foods, and generic store brands 

► decreases in income = occur for many people during economic turn downs; thus the demand for inferior goods

Question 23

EXPECTATIONS

Answer 23

Changes in consumers’ expectations about the future—especially future prices—can affect demand.

► IF consumers = expect prices to fall in the future, they may postpone a purchase until a later date –> causing current demand to decrease.
• Thus, when prices = expected to drop in the future; demand decreases.

► conversely, if consumers = expect prices to rise in the future, they may wish to purchase a good immediately –> to avoid a higher price.
• Reasoning often occurs in speculative markets: stock markets, housing markets, etc.
• Thus, in these markets, then, demand = increases when prices are low & are expected to rise.

Question 24

NUMBER OF BUYERS

Answer 24

Demand increases if new consumers enter the market, while it decreases if current consumers leave the market.
Examples: major population shifts, e.g., immigration / drop in the birthrate –> can create nationwide changes in demand
• As the # of teens & college students increases, the demand for cellphone increases.

Question 25

What happens when one of the non-price determinants changes?

Answer 25

► If positive influence, demand increases.
► If negative influence, demand decreases.

the shift is horizontal rather than vertical, b/c non-price determinants = affect the quantity demanded at each price.
• The quantity demanded at a given price = now higher (or lower), so the point on the curve = corresponding to that price is now further right (or left)

*KEY-POINT: shifts in the demand curve = caused by changes in the non-price determinants of demand ONLY!

If price increases/decreases, and everything stays the same it does not shift!
• Instead we simply look at a different point on the curve that describes what is actually happening in the market right now.