Chapter 3 - Markets

Question 1

What is a market?

Answer 1

A market refers to the buyers and sellers who trade a particular good or service

Question 2

What is the competitive market?

Answer 2

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

Question 3

What are the 4 characteristics of a perfectly competitive market?

Answer 3

1. Standardized good
2. Full information
3. No transaction costs
4. Participants are price takers

Question 4

Buyers and Sellers

Answer 4

Buyers (consumers) - determine the demand

Sellers (producers) - determine the supply

Question 5

Quantity demanded (definition)

Answer 5

the amount of a particular good or service that buyers are willing and able to purchase at a given price.

Question 6

Law of demand (definition)

Answer 6

states that the lower the price, the higher the quantity demanded. (vice versa, higher price = smaller quantity demanded)

If price falls, benefit of the good/service remains, but the opportunity cost falls. (if price goes up, opportunity cost goes up)

Question 7

Demand schedule (definition)

Answer 7

displays the quantities demanded at various prices

Question 8

Demand curve (definition)

Answer 8

illustrates the relationship between quantity demanded and the price of the good, holding all of the other non-price determinants constant.

• downward slope

Question 9

Non-price determinants of demand

Answer 9

1. Preference
2. Price of Related goods
3. Incomes
4. Expectations
5. Number of Buyers

Question 10

What happens when one of the non-price determinants changes?

Answer 10

• if positive influence, demand increases

- if negative influence, demand decreases

Question 11

Shifts in the demand curve

Answer 11

Right = demand increases 
Left  = demand decreases

Question 12

What is a shift?

Answer 12

Change in NON-PRICE determinant, increase/decrease in demand

Question 13

What is a movement?

Answer 13

Change in PRICE, increase/decrease in the quantity demanded

Question 14

Quantity supplied (definition)

Answer 14

the amount of a particular good that producers are willing and able to sell at a given price.

Question 15

Law of supply (definition)

Answer 15

the higher the price, the higher the quantity supplied, all other things equal. (vice versa, the lower the price, the smaller the quantity supplied)

If price goes up, benefit goes up with respect to opportunity cost. ( if price falls, benefit falls with respect to opportunity cost)

Question 16

Supply schedule (definition)

Answer 16

display the quantities supplied at various prices

Question 17

Supply curve (definition)

Answer 17

illustrates the relationship between the quantity supplied and the price of the good, holding all of the other non-price determinants constant.

upward slope

Question 18

What are the non-price determinants of supply?

Answer 18

1. Price of related goods
2. Technology
3. Price of Inputs
4. Expectations
5. Number of Producers

Question 19

What happens when one of the non-price determinants changes?

Answer 19

positive influence = supply increases

negative influence = supply decreases

Question 20

Shifts in the supply curve

Answer 20

supply increases - supply curve shifts to the right

supply decreases - supply curve shifts to the left

Question 21

Shift

Answer 21

change in NON PRICE determinant

Question 22

Movement

Answer 22

change in PRICE

Question 23

What is market equilibrium?

Answer 23

the point where the demand curve intersects the supply curve

• the quantity supplied exactly equals the quantity demanded

Question 24

What happens when the market is not in equilibrium? (disequilibrium)

Answer 24

• quantity demanded is not equal to quantity supplied
• if price is too high, EXCESS SUPPLY occurs and there is a SURPLUS of the good
• if price is too low, EXCESS DEMAND occurs and there is a SHORTAGE of the good or service

Question 25

What is a surplus?

Answer 25

provides incentives for the price to decrease

Qs - Qd

Question 26

What is a shortage?

Answer 26

provides incentives for the price to increase

Qd - Qs