Chapter 3: Book Outline

Question 1

Market:

Answer 1

Institution through which buyers and sellers meet to trade goods and services.

Question 2

Markets can be

Answer 2

virtual

Question 3

Consumption

Answer 3

the realization of want-satisfying capabilities; when our pressing needs are being satisfied

Question 4

Production

Answer 4

the creating of want-satisfying capabilities

Question 5

By trading some of the good you have produced

Answer 5

you can access other goods that provide you with more utility

Question 6

Exchange

Answer 6

transfer of a property right

Question 7

Consumer Surplus:

Answer 7

difference between marginal value and the price

Question 8

Producer Surplus:

Answer 8

Difference between marginal value curve and the price

Question 9

Transaction Costs

Answer 9

Costs involved i using the price mechanism

Question 10

Dead Weight Loss

Answer 10

potentially efficient trades that aren’t being made

Question 11

It is the consumption between middlemen that reduces transaction costs and converts

Answer 11

dead weight loss into utility

Question 12

Demand curves and supply curves both show

Answer 12

the relationship between changes in price and changes in quantity

Question 13

Comparative statics:

Answer 13

use of the demand and supply diagram to see what will happen to price and quantity following changes in the underlying economic conditions

Question 14

Factors that influence demand

Answer 14

• consumer tastes
• price of substitute goods
• income
• buyers’ expectations
• the number of consumers

Question 15

Factors that influence supply are those that affect the costs structures facing producers

Answer 15

• technological change
• prices of factor inputs
• number of supplies
• suppliers’ expectations
• prices of all other goods

Question 16

Key reason why the market ‘finds’ a new equilibrium following a shock

Answer 16

is because the price system adjusts to the new economic reality.

Question 17

Prices allow our subjective values to find

Answer 17

social harmony

Question 18

Price Controls

Answer 18

laws that set prices at certain levels

Question 19

Ceiling

Answer 19

when prices are kept at their market-clearing rate

ex: rent control

Question 20

Floor

Answer 20

When prices are kept above their market-clearing rate

Question 21

arbitrary price floors

Answer 21

do not change the economic reality

Question 22

glut

Answer 22

the difference between high supply and low demand - unemployment

Question 23

anti-price gouging laws

Answer 23

designed to prevent prices from spiking following natural disasters and are intended to protect consumers for explitation

Question 24

consequences of keeping prices at pre-emergency levels

Answer 24

creates incentives for people to hoard

reduces the incentive for suppliers to respond

Question 25

price spikes

Answer 25

are signals market is working

Question 26

beauty contest

Answer 26

where policymakers receive bids and make a judgement about which is best

Question 27

asymmetric information

Answer 27

occurs when actors on one side of the market have better quality information than those on the other

two implications

1. adverse selection
2. moral hazard

Question 28

George Akerlof

Answer 28

second hand car market, lemons

Question 29

Michael Spence

Answer 29

Signalling: occurs when the better informed person takes costly actions to transmit information to the poorly informed

Question 30

Joseph Stiglitz

Answer 30

Screening: occurs when the poorly informed elicit the well informed to reveal their characteristics

Question 31

information economics typically says

Answer 31

1. Markets work in theory
2. The real world has frictions
3. Solutions to market failures

Question 32

market friction

Answer 32

is the norm

Question 33

3 Schools of Thought

Answer 33

1. Chicago - Markets work, use markets
2. Keynesian - Markets fail, use government
3. Austrian - Markets fail, use markets