econChap4

Question 1

What is the central role that markets play in society?

Answer 1

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

Question 2

Define a market.

Answer 2

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

Question 3

What are the two main types of economies discussed?

Answer 3

Market economies and planned economies.

Question 4

Describe a market economy.

Answer 4

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

Question 5

Describe a planned economy.

Answer 5

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

Question 6

What is equilibrium in a market?

Answer 6

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

Question 7

What is the equilibrium price?

Answer 7

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

Question 8

What is the equilibrium quantity?

Answer 8

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

Question 9

What happens when the price is below equilibrium?

Answer 9

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

Question 10

What happens when the price is above equilibrium?

Answer 10

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

Question 11

What are the building blocks of market analysis?

Answer 11

Market demand and supply curves.

Question 12

Define a shortage.

Answer 12

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

Question 13

Define a surplus.

Answer 13

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

Question 14

How do prices in a market economy provide incentives?

Answer 14

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

Question 15

What causes the demand curve to shift?

Answer 15

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

Question 16

What causes the supply curve to shift?

Answer 16

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

Question 17

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

Answer 17

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

Question 18

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

Answer 18

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

Question 19

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

Answer 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

How can you tell if a market is in equilibrium?

Answer 22

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

Question 23

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

Answer 23

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.

Question 24

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

Answer 24

The demand curve has definitely shifted.

Question 25

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

Answer 25

The supply curve has definitely shifted.

Question 26

Why is water cheap despite being essential?

Answer 26

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

Question 27

Why are diamonds expensive despite not being essential?

Answer 27

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

Question 28

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

Answer 28

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

Question 29

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

Answer 29

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

Question 30

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

Answer 30

Parking spots during busy times.

Question 31

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

Answer 31

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

Question 32

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

Answer 32

Price effect is unclear; quantity increases.

Question 33

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

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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

Answer 35

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

Question 36

List factors that shift the demand curve.

Answer 36

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

Question 37

List factors that shift the supply curve.

Answer 37

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

Question 38

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

Answer 38

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

Question 39

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

Answer 39

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

Question 40

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

Answer 40

Because the marginal benefit of an additional litre is low.

Question 41

Explain how the price signal works in a market economy.

Answer 41

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

Question 42

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

Answer 42

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

Question 43

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

Answer 43

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

Question 44

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

Answer 44

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

Question 45

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

Answer 45

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.

Question 46

What is a secondary market?

Answer 46

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

Question 47

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

Answer 47

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

Question 48

What are normal goods?

Answer 48

Goods for which demand increases as income increases.

Question 49

What are inferior goods?

Answer 49

Goods for which demand decreases as income increases.

Question 50

How do prices act as profit signals for firms?

Answer 50

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

Question 51

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

Answer 51

Equilibrium price increases and equilibrium quantity increases.

Question 52

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

Answer 52

Equilibrium price decreases and equilibrium quantity increases.

Question 53

What role do consumers play in the labour market?

Answer 53

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

Question 54

What role do businesses play in the labour market?

Answer 54

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

Question 55

How can external factors like weather affect market equilibrium?

Answer 55

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

Question 56

Explain the concept of ‘marginal’ in economics.

Answer 56

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

Question 57

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

Answer 57

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

Question 58

What is the ‘morning-evening’ method?

Answer 58

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

Question 59

How do secondary markets help resolve shortages or surpluses?

Answer 59

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

Question 60

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

Answer 60

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.

Question 61

Why is equilibrium important in economic analysis?

Answer 61

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

Question 62

How do expectations influence demand and supply?

Answer 62

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

Question 63

Give an example of how congestion can affect demand.

Answer 63

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

Question 64

Explain network effects in the context of markets.

Answer 64

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