Chapter 3

Question 1

What is a “market economy”?

Answer 1

Resources are allocated among households and firms with little or no government interference.

Question 2

What is the phrase “invisible hand” used to describe?

Answer 2

Unobservable market forces that guide resources to their highest- valued use.

Question 3

When does a “competitive market” exist?

Answer 3

A competitive market exists when there are so many buyers and sellers that each has only a small (negligible) impact on the market price and output.

Question 4

When does an “imperfect market” exist?

Answer 4

An imperfect market is one in which either the buyer or the seller can influence the market price.

Question 5

What is a “monopoly”?

Answer 5

A monopoly exists when a single company supplies the entire market for a particular good or service.

Question 6

What is “market power”?

Answer 6

Market power is a firm’s ability to influence the price of a good or service by exercising control over its demand, supply, or both.

Question 7

What is the “quantity demanded”?

Answer 7

The quantity demanded is the amount of a good or service that buyers are willing and able to purchase at the current price.

Question 8

What is the “law of demand”?

Answer 8

The law of demand states that, all other things being equal, quantity demanded falls when the price rises, and rises when the price falls. This shows a negative relationship between price and the quantity demanded.

• Buyers are more willing to buy when prices are low to increase savings

Question 9

What is a “demand schedule”?

Answer 9

A demand schedule is a table that shows the relationship between the price of a good and the quantity demanded.

Question 10

What is “market demand”?

Answer 10

Market demand is the sum of all the individual quantities demanded by each buyer in the market at each price.

Question 11

What are the factors that shift the demand curve?

Answer 11

• Changes in Buyer’s Income
• The Price of Related Goods (Complements/Substitutes)
• Changes in Tastes and Preferences
• Price Expectation
• The Number of Buyers
• Taxes

Question 12

What is the “quantity supplied”?

Answer 12

The quantity supplied is the amount of a good or service that producers are willing and able to sell at the current price.

Question 13

What does the “law of supply” state?

Answer 13

The law of supply states that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls.

• Suppliers are more willing to sell at higher prices as they will generate more profit

Question 14

What is a “supply schedule”?

Answer 14

A supply schedule is a table that shows the relationship between the price of a good and the quantity supplied.

Question 15

What is “market supply”?

Answer 15

Market supply is the sum of the quantities supplied by each seller in the market at each price.

Question 16

What are the factors that shift the supply curve?

Answer 16

• The Cost of Inputs
• Changes in Technology or the Production Process
• Taxes and Subsidies
• The number of sellers in the industry
• Price Expectation

Question 17

What factor does not affect the shift in demand or supply curve?

Answer 17

PRICE

Question 18

When does “market equilibrium” occur?

Answer 18

Equilibrium occurs at the point where the demand curve and the supply curve intersect.

Question 19

What is the “equilibrium price” (market-clearing price)?

Answer 19

The equilibrium price is the price at which the quantity supplied is equal to the quantity demanded.

• No shortage or surplus

Question 20

What is the “law of supply and demand”?

Answer 20

The law of supply and demand states that the market price of any good will adjust to bring the quantity supplied and the quantity demanded into balance.

Question 21

What is a “shortage” and what is done to adjust the market to reach equilibrium in competitive markets?

Answer 21

A shortage occurs whenever the quantity supplied is less than the quantity demanded.

• Suppliers raise the price until the equilibrium point is reached.

Question 22

What is a “surplus” and what is done to adjust the market to reach equilibrium in competitive markets?

Answer 22

A surplus occurs whenever the quantity supplied is greater than the quantity demanded.

• Suppliers lower their price in an effort to sell the unwanted goods.