Competency 4: Cheat Sheet

Question 1

What is a market?

Answer 1

A group of buyers and sellers selling goods/services; can be highly organized (like a Foreign Exchange Market) or unorganized (like a yard sale)

Question 2

What is competition (competitive market)?

Answer 2

Many buyers & sellers; no 1 seller/buyer has market power; no single buyer/seller can affect the equilibrium market price.

Question 3

What is consumer demand?

Answer 3

The amount buyers are willing and able to purchase at a certain price.

Question 4

What is utility?

Answer 4

Measure of satisfaction/happiness from consuming a good/service.

Question 5

What is constrained utility maximization?

Answer 5

getting the most happiness within a limited budget.

Question 6

What are consumer preferences?

Answer 6

Consumers’ tastes/preferences influence what gives them happiness/satisfaction.

Question 7

What is a budget constraint?

Answer 7

A line that shows the combinations of goods a consumer can afford with a given income and prices.

Question 8

What is marginal utility?

Answer 8

The added satisfaction from consuming one more unit of a good.

Question 9

What is the Diminishing Marginal Utility?

Answer 9

As a consumer consumes more of a good, the marginal utility (satisfaction) from each additional unit decreases.

Explain why demand curved slope downward.

Question 10

What is the law of demand?

Answer 10

When the price of good rises, quantity demanded falls; when price falls, quantity demanded rises.

Question 11

What is the quantity demanded?

Answer 11

The amount of a good that buyers are willing and able to purchase (a point on the demand curve).

Question 12

What is a demand curve?

Answer 12

A graph that shows downward sloping (as price decreases, demand increases).

Question 13

What causes a movement along the demand curve?

Answer 13

Price change

Question 14

What causes a shift in the demand curve?

Answer 14

Changes in income, prices of related goods, tastes, expectations, and number of buyers.

Question 15

Why is the demand curve downward sloping?

Answer 15

Due to diminishing marginal utility and the Law of Demand.

Question 16

What is market equilibrium?

Answer 16

The point where the quantity demanded equals the quantity supplied

Question 17

What is a surplus and shortage?

Answer 17

Surlpus= price is too high (excess supply).

Shortage = price is too low
(excess demand).

Question 18

What happens when both demand and supply increase?

Answer 18

Quantity increases; price change is uncertain.

Question 19

What is the law of supply (sellers)?

Answer 19

As the price of a good increases, the quantity supplied decreases, and vice versa.

Question 20

What is quantity supplied?

Answer 20

The amount of a good that sellers are willing and able to sell (a point on the supply curve).

Question 21

What is a supply curve?

Answer 21

Upward sloping (as price increases quantity supplied increases)

Question 22

what causes a movement along the supply curve?

Answer 22

Price change

Question 23

What causes a shift in the supply curve?

Answer 23

Changes in input prices, technology, expectations, and number of sellers.

Question 24

What is the difference between a change in supply and a change in quantity supplied?

Answer 24

Change in supply shifts the curve; change in quantity supplied is movement along the curve due to price change.

Question 25

What is elasticity?

Answer 25

Measures how demand responds to changes in price, income, or related goods’ prices.

Question 26

What is the difference between elastic & inelastic demand?

Answer 26

Elastic (>1): big response to price change (e.g., Teslas). Inelastic (<1): small response to price change (e.g., gasoline)

Question 27

What does a positive income elasticity indicate?

Answer 27

Normal good (demand increases with income).

Question 28

What is Price Elasticity of Demand?

Answer 28

% change in quantity demanded / % change in price.

Question 29

What are the determinants of price elasticity of demand?

Answer 29

Availability of close substitutes, necessities vs. luxuries, definition of the market, and time horizon.

Question 30

What is the midpoint formula for price elasticity of demand?

Answer 30

(ΔQ / avg Q) ÷ (ΔP / avg P)

Question 31

What is income elasticity of demand?

Answer 31

% change in quantity demanded / % change in income.

Question 32

What is cross-price elasticity of demand?

Answer 32

% change in quantity demanded of good A / % change in price of good B.

Question 33

What is a normal good?

Answer 33

A good for which demand increases as income increases (i.e., Steak, Jordans)

Question 34

What is an inferior good?

Answer 34

A good for which demand decreases as income increases (i.e., ramen noodles).

Question 35

What is a substitute good?

Answer 35

A good (same & same job) that can replace another; if the price of one increases, demand for the other increases (i.e., Coke or Pepsi).

Question 36

What is a complementary good?

Answer 36

A good that is used with another good; i.e., coffee & creamer

Question 37

Why is the supply curve upward-sloping?

Answer 37

As price increases, quantity supplied increases.

Question 38

What does a positive cross-price elasticity indicate?

Answer 38

The goods are substitutes.

Question 39

What does a negative income elasticity indicate?

Answer 39

inferior Good (demand decreases with income).

Question 40

What does a negative cross-price elasticity indicate?

Answer 40

The goods are complements.

Question 41

If cereal prices fall, what happens to milk demand and price?

Answer 41

Milk demand increases (complements), price and quantity both rise.

Question 42

What happens when both demand and supply increase?

Answer 42

Quantity increases; price effect is uncertain.