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ECON 1101 > econChap4 > Flashcards

econChap4 Flashcards

1
Q

What is the central role that markets play in society?

A

Markets determine what is produced, how it is produced, by whom, and who gets the goods.

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2
Q

Define a market.

A

A market is any setting that brings together potential buyers and sellers.

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3
Q

What are the two main types of economies discussed?

A

Market economies and planned economies.

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4
Q

Describe a market economy.

A

An economy organized around markets, where prices provide incentives instead of central planning.

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5
Q

Describe a planned economy.

A

An economy organized around central plans, where a central planner determines production and allocation.

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6
Q

What is equilibrium in a market?

A

A market is in equilibrium when the quantity supplied equals the quantity demanded.

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7
Q

What is the equilibrium price?

A

The price at which the quantity supplied equals the quantity demanded.

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8
Q

What is the equilibrium quantity?

A

The quantity of goods bought and sold at the equilibrium price.

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9
Q

What happens when the price is below equilibrium?

A

A shortage occurs, leading to an increase in price until equilibrium is reached.

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10
Q

What happens when the price is above equilibrium?

A

A surplus occurs, leading to a decrease in price until equilibrium is reached.

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11
Q

What are the building blocks of market analysis?

A

Market demand and supply curves.

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12
Q

Define a shortage.

A

When the quantity demanded exceeds the quantity supplied at a given price.

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13
Q

Define a surplus.

A

When the quantity supplied exceeds the quantity demanded at a given price.

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14
Q

How do prices in a market economy provide incentives?

A

Higher prices incentivize producers to supply more, while lower prices incentivize consumers to buy more.

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15
Q

What causes the demand curve to shift?

A

Changes in income, preferences, prices of related goods, expectations, congestion and network effects, and the type and number of buyers.

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16
Q

What causes the supply curve to shift?

A

Changes in input prices, productivity and technology, other opportunities and prices of related outputs, expectations, and the type and number of sellers.

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17
Q

Describe the effect of an increase in demand on equilibrium price and quantity.

A

An increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and a larger equilibrium quantity.

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18
Q

Describe the effect of a decrease in demand on equilibrium price and quantity.

A

A decrease in demand shifts the demand curve to the left, leading to a lower equilibrium price and a smaller equilibrium quantity.

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19
Q

Describe the effect of an increase in supply on equilibrium price and quantity.

A

An increase in supply shifts the supply curve to the right, leading to a lower equilibrium price and a larger equilibrium quantity.

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20
Q

Describe the effect of a decrease in supply on equilibrium price and quantity.

A

A decrease in supply shifts the supply curve to the left, leading to a higher equilibrium price and a smaller equilibrium quantity.

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21
Q

What are the three symptoms of a market out of equilibrium, also known as disequilibrium?

A
  1. Queueing.
  2. Bundling of extras.
  3. A secondary market.
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22
Q

How can you tell if a market is in equilibrium?

A

If the price is not changing, indicating that quantity supplied equals quantity demanded.

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23
Q

Explain how the morning-evening method helps analyze shifts in supply and demand.

A

It allows you to consider one shift at a time by imagining one curve shifts in the morning and the other in the evening, then add up the effects.

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24
Q

what does it mean if prices and quantities move in the same direction?

A

The demand curve has definitely shifted.

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25
Q

what does it mean if prices and quantities move in opposite directions?

A

The supply curve has definitely shifted.

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26
Q

Why is water cheap despite being essential?

A

Because the supply of water is plentiful and cheap to produce, offsetting its high demand due to essentiality.

27
Q

Why are diamonds expensive despite not being essential?

A

Because diamonds are scarce and expensive to mine, offsetting their demand.

28
Q

How do markets move towards equilibrium when there is a shortage?

A

Prices rise, incentivizing suppliers to increase supply and reducing demand until equilibrium is reached.

29
Q

How do markets move towards equilibrium when there is a surplus?

A

Prices fall, incentivizing suppliers to decrease supply and increasing demand until equilibrium is reached.

30
Q

Give an example of a market where supply cannot adjust to eliminate a shortage.

A

Parking spots during busy times.

31
Q

Explain how simultaneous shifts in supply and demand can affect equilibrium.

A

The overall effect on price depends on which shift is larger; quantity usually changes based on the direction of shifts.

32
Q

What is the effect of an increase in both supply and demand on equilibrium price and quantity?

A

Price effect is unclear; quantity increases.

33
Q

What is the effect of an increase in supply and a decrease in demand on equilibrium price and quantity?

A

Equilibrium Price: Decreases (definite effect)
Equilibrium Quantity: Ambiguous (depends on the relative magnitudes of the shifts)

34
Q

What is the effect of a decrease in supply and an increase in demand on equilibrium price and quantity?

A

Equilibrium Price: Increases (definite effect)
Equilibrium Quantity: Ambiguous (depends on the relative magnitudes of the shifts)

35
Q

What is the effect of a decrease in both supply and demand on equilibrium price and quantity?

A

Equilibrium Price: Ambiguous (depends on the relative magnitudes of the shifts)
Equilibrium Quantity: Decreases (definite effect)

36
Q

List factors that shift the demand curve.

A

Income changes, preferences, prices of related goods, expectations, congestion and network effects, type and number of buyers.

37
Q

List factors that shift the supply curve.

A

Input prices, productivity and technology, other opportunities and prices of related outputs, expectations, type and number of sellers.

38
Q

How do changes in income affect demand for normal and inferior goods?

A

Income increases demand for normal goods and decreases demand for inferior goods.

39
Q

Explain the difference between the marginal benefit curve and the total benefit.

A

The marginal benefit curve represents the benefit of an additional unit, while total benefit is the sum of all benefits.

40
Q

Why is the willingness to pay for the marginal litre of water low despite its total benefit being high?

A

Because the marginal benefit of an additional litre is low.

41
Q

Explain how the price signal works in a market economy.

A

The price reflects supply and demand, signaling producers to supply more or less and consumers to buy more or less.

42
Q

Describe a real-world example of a supply shift due to technology.

A

Lowering the cost of batteries for hybrid cars increases supply, leading to lower prices and higher quantities.

43
Q

Describe a real-world example of a demand shift due to preferences.

A

The ALS ice bucket challenge increases demand for ALS medical research funds, leading to higher price and quantity.

44
Q

Explain the impact of a decrease in supply and an increase in demand using the gas market example from 2008.

A

The equilibrium quantity falls; price is unclear due to opposing shifts.

45
Q

How did 9/11 affect the market for New York office space?

A

Supply decreased due to destruction of office space; demand also decreased due to perception of less safety, leading to an unclear effect on price and a lower quantity.

46
Q

What is a secondary market?

A

A market where goods are resold, often at prices different from the original market.

47
Q

How does a change in price affect demand and supply curves?

A

A change in price causes a movement along the demand or supply curve, not a shift of the curve.

48
Q

What are normal goods?

A

Goods for which demand increases as income increases.

49
Q

What are inferior goods?

A

Goods for which demand decreases as income increases.

50
Q

How do prices act as profit signals for firms?

A

Higher prices indicate higher demand, signaling firms to produce more to earn higher profits.

51
Q

What happens to the equilibrium price and quantity when demand increases and supply remains unchanged?

A

Equilibrium price increases and equilibrium quantity increases.

52
Q

What happens to the equilibrium price and quantity when supply increases and demand remains unchanged?

A

Equilibrium price decreases and equilibrium quantity increases.

53
Q

What role do consumers play in the labour market?

A

Consumers can be suppliers in the labour market, selling their labor for wages.

54
Q

What role do businesses play in the labour market?

A

Businesses can be buyers in the labour market, buying labor from workers.

55
Q

How can external factors like weather affect market equilibrium?

A

They can shift demand or supply curves, leading to changes in equilibrium price and quantity.

56
Q

Explain the concept of ‘marginal’ in economics.

A

Marginal refers to the additional benefit or cost of consuming or producing one more unit of a good.

57
Q

Why might prices remain unchanged even when both supply and demand increase?

A

If the increase in supply and demand are roughly equal, they can offset each other’s effect on price.

58
Q

What is the ‘morning-evening’ method?

A

A technique to analyze simultaneous shifts in supply and demand by considering one shift at a time and then combining the effects.

59
Q

How do secondary markets help resolve shortages or surpluses?

A

They allow buyers and sellers to trade at different prices, helping to balance supply and demand.

60
Q

What is the difference between movement along a curve and a shift of the curve?

A

Movement along a curve is caused by a change in price, while a shift of the curve is caused by other factors affecting demand or supply.

61
Q

Why is equilibrium important in economic analysis?

A

It determines the price and quantity at which supply equals demand, providing a stable market condition.

62
Q

How do expectations influence demand and supply?

A

Expectations about future prices or availability can shift demand and supply curves based on anticipated changes.

63
Q

Give an example of how congestion can affect demand.

A

Increased traffic congestion may reduce the demand for driving, shifting the demand curve for cars to the left.

64
Q

Explain network effects in the context of markets.

A

Network effects occur when the value of a product increases as more people use it, shifting the demand curve to the right.

ECON 1101 (10 decks)

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