Chapter 3

Question 1

Competition

Answer 1

the process by which market participants, in pursuing their own interests, attempt to outdo, outprice, outproduce, and outmaneuver each other. By extension, competition is also the process by which market participants attempt to avoid being outdone, outpriced, outproduced, or outmaneuvered by others.

Question 2

Perfect competition (in extreme form)

Entry into and exit from a perfectly competitive market is

Since each competitor produces only a small share of the total output, the individual competitor cannot

Answer 2

• is a market composed of numerous independent sellers and buyers of an identical product, such that no one individual seller or buyer has the ability to affect the market price by changing the production level.
• unrestricted. Producers can start up or shut down production at will. Anyone can enter the market, duplicate the good, and compete for consumers’ dollars.
• significantly influence the degree of competition or the market price by entering or leaving the market.

Question 3

Demand

Answer 3

the assumed inverse relationship between the price of a good or service and the quantity consumers are willing and able to buy during a given period, all other things held constant.

Question 4

Supply

Answer 4

is the assumed relationship between the quantity of a good producers are willing to offer during a given period and the price, everything else held constant. Generally, because additional costs tend to rise with expanded production, this relationship is presumed to be positive

Question 5

Marginal cost

Answer 5

is the additional cost of producing an additional unit of output.

Question 6

Market equilibrium

Answer 6

occurs when the forces of supply and demand are in balance with no net pressure for the price and output level to change.

Question 7

market surplus

Answer 7

is the amount by which the quantity supplied exceeds the quantity demanded at any given price.

Question 8

market shortage

Answer 8

is the amount by which the quantity demanded exceeds the quantity supplied at any given price.

Question 9

Efficiency

Answer 9

is the maximization of output through careful allocation of resources, given the constraints of supply (producers’ costs) and demand (consumers’ preferences).

Question 10

Market inefficiency

Answer 10

is the extent to which potential net gains from trades are not generated.

McKenzie, Richard B.. Microeconomics for MBAs (p. 148). Cambridge University Press. Kindle Edition.

Question 11

Short-run equilibrium

Answer 11

is the price–quantity combination that will exist as long as producers do not have time to change their production facilities (or some other resource that is fixed in the short run).

McKenzie, Richard B.. Microeconomics for MBAs (p. 148). Cambridge University Press. Kindle Edition.

Question 12

Long-run equilibrium

Answer 12

is the price–quantity combination that will exist after firms have had time to change their production facilities (or some other resource that is fixed in the short run).

Question 13

The market is a system that _________

To respond to these, producers must ________

They must compete with _______

Answer 13

1. provides producers with incentives to deliver goods and services to others.
2. meet the needs of society.
3. other producers to deliver goods and services in the most cost-effective manner

Question 14

A market implies that sellers and buyers can ______

It does not mean, however, that behavior is_______

What a competitor can do may be __________

Answer 14

1. freely respond to incentives and that they have options and can choose among them.
2. totally unconstrained of that producers can choose from unlimited options.
3. severely limited by what rival firms are willing to do.

Question 15

Demand curves for products and labor (or any other input) slope __________

Supply curves for products and labor slope _________

Answer 15

downward (and represent inverse relationships between price and quantity demanded).

upward (and represent positive relationships between price and quantity produced).

Question 16

Determinants of demand include:

1

2

3

4

5

Answer 16

1. a change in consumer tastes & preferences;
2. a change in the price of related goods (substitutes & complements);
3. a change in consumer incomes;
4. a change in the number of consumers; and
5. a change in expectations about future prices and incomes.

Question 17

Determinants of supply include:

1

2

3

4

5

6

Answer 17

1. a change in the productivity due to a change in technology;
2. a change in the profitability of producing other goods;
3. a change in the number of sellers in the market;
4. a change in the scarcity (and prices) of various productive resources;
5. a change in taxes and subsidies on production;
6. a change in producer expectations about future prices.

Question 18

Price and quantity in competitive markets will tend to move

Answer 18

toward the intersection of supply and demand, which is the point of maximum efficiency.

Question 19

Market shortages will lead to price

Market surpluses will lead to price

Answer 19

increases.

decreases.

Question 20

Equilibrium price and quantity in competitive markets can be expected to change in predictable ways relative to

Answer 20

increases and decreases in supply and demand.

Question 21

Obstructions to price movement upward to equilibrium give rise to

Obstructions to price movement down toward equilibrium give rise to

Answer 21

market shortages.

market surpluses.

Question 22

Wage rates are determined by

The demand for labor is a function of

The supply of labor is determined by workers’

Answer 22

1. the interaction of essentially the same market forces that determine the prices of products.
2. workers’ productivity and the prices secured for the products which workers help produce.
3. opportunity costs and by working conditions.

Question 23

An increase in the price of the product workers produce can lead to

An increase in worker nonwage benefits can be expected to lead to a

Answer 23

1. an increase in workers’ wage rate in competitive labor markets.
2. reduction in workers’ wage rate in competitive labor markets.

Question 24

The market system is not perfect. Producers may have difficulty

People take time to

and producers can make high profits while

Answer 24

acquiring enough information to make reliable production decisions.

respond to incentives,

other are gathering their resources to respond to an opportunity.

Question 25

An uncontrolled market system also carries with it the possibility that one firm will acquire

Answer 25

at least some monopoly power, restricting the ability of others to enter into competition, produce more, and push prices and profits down

Question 26

Under certain conditions, firms would be well advised not to

Current and prospective pay can be used as

Answer 26

match up worker pay with worker “worth” at every moment in time.

a means of increasing worker productivity and rewards over time.

Question 27

Mandatory retirement can also have

Mandatory retirement can allow for

which can increase

Answer 27

unheralded benefits for workers as well as their employers.

“overpayments” for workers,

workers’ incentives to improve their productivity over the course of their careers.