Chapter 3

Question 1

Market Economy

Answer 1

an economy in which private individuals, rather than a centralized planning authority, make the decisions

Question 2

Market

Answer 2

Buyers and sellers who trade a particular good or service

Question 3

Competitive Market

Answer 3

a market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service;

• a standardized good
• full information
• no transaction costs
• price-taking participants

Question 4

Standardized Good

Answer 4

a good for which any two units have the same features and are interchangeable

Question 5

Transaction Costs

Answer 5

the costs incurred by buyer and selling in agreeing to and executing a sale of goods or services

Question 6

Price Taker

Answer 6

a buyer or seller who cannot affect the market price

Question 7

Demand

Answer 7

how much of something people are willing and able to buy under certain circumstances

Question 8

Quantity Demanded

Answer 8

the amount of a particular good that buyers will purchase at a given price during a specified period

Question 9

Law of Demand

Answer 9

a fundamental characteristic of demand which states that, all else equal, quantity demanded rises as price falls

Question 10

Demand Schedule

Answer 10

a table that shows the quantities of a particular good or service that consumers will demand at various prices

Question 11

Demand Curve

Answer 11

a graph that shows the quantities of a particular good or service that consumers will demand at various prices; represents each price-quantity combination from the demand schedule as a point on a graph;
(quantity goes on the x-axis; price on the y-axis)

Question 12

Demand: Five Major Categories of Non-price Determinants

Answer 12

1. Consumer Preference
2. Price of Related Goods
3. Incomes
4. Expectations of Future Prices
5. Number of Buyers in the Market

Question 13

Consumer Preference

Answer 13

personal likes and dislikes that make buyers more or less inclined to purchase a good

Question 14

Substitutes

Answer 14

goods that serve a similar-enough purpose that a consumer might purchase one in place of the other

Question 15

Complements

Answer 15

goods that are consumed together so that purchasing one will make consumers more likely to purchase the other

Question 16

Normal Goods

Answer 16

goods for which demand increases as income increases

Question 17

Inferior Goods

Answer 17

goods for which demand decreases as income increases

Question 18

Quantity Supplied

Answer 18

the amount of a particular good or service that producers will offer for sale at a given price during a specified period

Question 19

Law of Supply

Answer 19

a fundamental characteristic of supply which states that, all else equal, quantity supplied rises as price rises

Question 20

Supply Schedule

Answer 20

a table that shows the quantities of a particular good or service that producers will supply at various prices

Question 21

Supply: Five Major Categories of Non-price Determinants

Answer 21

1. prices of related goods
2. technology
3. prices of inputs
4. expectations of future prices
5. number of sellers in the market

Question 22

Equilibrium

Answer 22

the situation in a market when the quantity supplied equals the quantity demanded; graphically, this convergence happens when the demand curve intersects the supply curve

Question 23

Equilibrium Price

Answer 23

the price at which the quantity supplied equals the quantity demanded

Question 24

Equilibrium Quantity

Answer 24

the quantity that is supplied and demanded at equilibrium price

Question 25

Market Demand

Answer 25

the sum of all individual consumer choices at any given time, with any given price

Question 26

Ceteris Paribus

Answer 26

“all other things being the same”; first requirement for the law of demand; when all else is held equal, quantity demanded rises as price falls