Chapter 3: Demand, Supply, and Market Equilibrium

Question 1

What is a market?

Answer 1

A market brings together buyers (demanders) and sellers (suppliers) to exchange goods and services.

Question 2

Name two examples of everyday consumer markets.

Answer 2

Local markets (e.g., corner gas stations, local bakeries) and online markets (e.g., Amazon.com).

Question 3

What are stock exchanges?

Answer 3

Stock exchanges are marketplaces where stocks, bonds, and commodities are traded (e.g., NYSE, Chicago Board of Trade).

Question 4

Who are the participants in labor markets?

Answer 4

New college graduates (sellers of labor services) and employers (buyers of labor services).

Question 5

How do ride-sharing markets function?

Answer 5

Platforms like Uber and Lyft match buyers (customers needing rides) with sellers (drivers offering rides).

Question 6

What are two key characteristics of markets?

Answer 6

Geographic scope (local, national, international) and the level of personal interaction (face-to-face vs. online).

Question 7

What defines a competitive market?

Answer 7

Large numbers of independent buyers and sellers trading standardized products.

Question 8

What are the key elements in market dynamics?

Answer 8

Demand, supply, price, and quantity, with price determined by the interactions of buyers and sellers.

Question 9

What does demand represent?

Answer 9

Demand shows the quantities of a product consumers are willing and able to purchase at various prices over a specific time.

Question 10

What is the law of demand?

Answer 10

As price decreases, quantity demanded increases, and vice versa (inverse relationship).

Question 11

What distinguishes a change in demand from a change in quantity demanded?

Answer 11

A change in demand shifts the entire demand curve, while a change in quantity demanded moves along the same curve due to price changes.

Question 12

Name the determinants that can affect demand.

Answer 12

Consumer tastes, number of buyers, consumer income, prices of related goods, or consumer expectations.

Question 13

What does supply indicate?

Answer 13

Supply shows the amounts of a product that producers are willing to sell at different prices during a specific period.

Question 14

What is the law of supply?

Answer 14

Higher prices lead to greater quantities supplied; lower prices lead to lesser quantities supplied (positive relationship).

Question 15

How do changes in supply differ from changes in quantity supplied?

Answer 15

Changes in supply shift the supply curve, while changes in quantity supplied are movements along the curve due to price changes.

Question 16

What is market equilibrium?

Answer 16

Market equilibrium occurs when the quantity demanded equals the quantity supplied at a specific price (equilibrium price).

Question 17

What happens when prices are above equilibrium?

Answer 17

A surplus occurs, leading to downward pressure on prices.

Question 18

What is a price ceiling?

Answer 18

A maximum price set by the government, intended to make essential goods affordable, but can lead to shortages.

Question 19

What is a price floor?

Answer 19

A minimum price set by the government that can create surpluses and disrupt market efficiency.

Question 20

What types of efficiency are achieved at market equilibrium?

Answer 20

Productive efficiency (lowest production cost) and allocative efficiency (resources directed to the most valued uses).

Question 21

what is the income effect?

Answer 21

A change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product’s price.

Question 22

what is the demand schedule?

Answer 22

A table of numbers showing the amounts of a good or service buyers are willing and able to purchase at various prices over a specified period of time.

Supply schedule would show but instead for supply

Question 23

what is the substitution effect?

Answer 23

suggests that buyers have an incentive to substitute a product whose price has fallen for other products whose prices have remained the same.

The substitution occurs because the product whose price has fallen is now “a better deal” relative to the other products, whose prices remain unchanged.

Question 24

what are superior/normal goods

Answer 24

goods that as consumer income goes up, the demand for these products goes up. they aren’t necessarily higher in quality however

Question 25

what are inferior goods?

Answer 25

goods that has consumer income decreases, the demand for these products rises. They aren’t necessarily worse in quality.

Question 26

what are substitue/complentary goods?

Answer 26

A substitute good is one that can be used in place of another good.

A complementary good is one that is used together with another good.

Question 27

what are the determinants of supply?

Answer 27

1) resource prices, (2) technology, (3) taxes and subsidies, (4) prices of other goods, (5) producer expectations, and (6) the number of sellers in the market.

Question 28

what is equilibrium price?

Answer 28

the price where the intentions of buyers and sellers match.

Question 29

what is the equilibrium quantity?

Answer 29

the quantity at which the intentions of buyers and sellers match, so that the quantity demanded equals quantity supplied