Chapter 4

Question 1

Ceterus Paribus

Answer 1

Other factors are not changing

Question 2

Competitive market

Answer 2

Market in which there are so mant buyers and sellers so that each individual buyer or seller has no impact on the market (no monopoly)

Question 3

Conditions for competitive market

Answer 3

• A lot of buyers
• A lot of sellers
• All offered goods should be same or of the same quality
• Assuming everybody has full knowledge of the market

Question 4

Law of Demand

Answer 4

The price of the good and demand for this good have negative correlation given that other factors are not changing

Question 5

Law of Supply

Answer 5

The price of the good and the supply for this good have positive correlation given that other factors are not changing

Question 6

Normal good

Answer 6

If demand for the good falls when people have less income it is normal good

Question 7

Inferior good

Answer 7

If the demand for the good increases when people have less income it is inferior good

Question 8

Related goods

Answer 8

If price of one good affects demand for the other they are related goods

Question 9

Complements

Answer 9

When price of one good falls and the demand for other good rises they are complements - usually used together
E.g. cars and gasoline

Question 10

Substitutes

Answer 10

When price of one good falls and the demand for other good decreases they are substitutes - usually used instead of the other
E.g. Hamburgers and Hotdogs

Question 11

Factors affecting demand

Answer 11

Tastes - if you like Apple you will buy Iphone even if its far more expensive than android
Future expectations - if you expect the price of the good to fall in the future you will not buy it now and wait until the price will drop
Number of customers - increase in # of customers increases demand for the good at all price levels

Question 12

Factors affecting supply

Answer 12

Input prices - if the ingredients to produce the good increase in price then the good will become more expensive
Expectations - If the firm expects the price of the good to increase it may put some of the goods to storage to sell later
Number of sellers - If there are more sellers then there will be more supply at any given price

Question 13

Equilibrium point

Answer 13

Also called market clearing price, where amount of good supplied equals amount of good demanded. In the graph it is intersection of supply and demand curves.

Question 14

Surplus

Answer 14

It is when the supply is more than demand. The prices will fall because not every good is selled and the demand will increase because goods are cheaper now

Question 15

Shortage

Answer 15

It is when the demand is more than supply. The prices will increase as there is more demand.

Question 16

The law of supply and demand

Answer 16

When there is surplus or shortage at any given point, after some time market will stop at equilibrium price.

Question 17

Market

Answer 17

A group of buyers and sellers of a particular good or service

Question 18

A change in price of the good

Answer 18

does not change the supply or demand curve, it simply represents the movement along the fixed supply curve