Chapter 5

Question 1

Define equilibrium

Answer 1

Equilibrium:
balance between opposing forces

Market equilibrium:
the combination of price and quantity where quantity demanded is equal to quantity supplied

Question 2

Describe market adjustments toward equilibrium. What is a Shortage and Surplus and how will sellers react to each?

Answer 2

Shortage:
a situation where the quantity demanded is greater than the quantity supplied, measured by the difference between quantity demanded and quantity supplied (Sellers increase prices)

Surplus:
a situation where the quantity supplied is greater than the quantity demanded, measured by the difference between quantity supplied and quantity demanded (Sellers reduce prices)

Question 3

Solve for equilibrium in a market algebraically and graphically

Answer 3

See Figure 5.1 and the paragraph that follows. (Need to be able to solve equations simultaneously) This is important.

Question 4

Graphically represent changes in equilibrium when demand shifts when demand and/or supply shifts

Answer 4

This is important! See Figure 5.2 and 5.3

Question 5

Predict changes in equilibrium quantity and equilibrium price when demand and/or supply shifts

Answer 5

See Table 5.2 This is important

Question 6

Define allocative efficiency

Answer 6

Allocative efficiency:
resources are assigned (or “allocated”) to uses where they are most highly valued

Question 7

Interpret allocative efficiency as
Using resources where they are most highly valued

The point where marginal benefit is equal to marginal cost

Market equilibrium

Maximum total surplus

Answer 7

If allocative efficiency is achieved where MB = MC, that gives us a second way of interpreting allocative efficiency. It is the point where resources are used where they are most highly valued, but that will also be at the point where MB = MC. In addition, the point where MB = MC is also the point where the demand and supply intersect, so this point of allocative efficiency will also coincide with the equilibrium point in a market.

Question 8

Define, measure, and graph consumer surplus and producer surplus with linear demand and supply curves or equation

Answer 8

See Figure 5.5/5.6 This is important

Question 9

Define measure, and graph deadweight loss given linear demand and supply curves or equations

Answer 9

See Figure 5.7 This is important

Underproduction:
producing less than the level of output that satisfies allocative efficiency

Question 10

Identify obstacles to allocative efficiency

Question 11

Recognize potential for tension between efficiency and ethical concerns

Answer 11

Price gouging:
increases in price viewed as excessive or exploitative

Question 12

Define and compare various ethical goals

Rules

Results

Virtue ethics

Justice

Answer 12

Rules: Rules ethical perspective:
ethical view focused on the legal or social regulations

Results ethical perspective:
ethical perspective that focuses on achievement of a specific goal

Virtue ethics perspective:
ethical view focused on virtue or character demonstrated in a given situation

Justice ethical perspective:
ethical perspective that focuses on fairness or mitigating potential adverse effects for individuals or groups