econChap4 Flashcards
What is the central role that markets play in society?
Markets determine what is produced, how it is produced, by whom, and who gets the goods.
Define a market.
A market is any setting that brings together potential buyers and sellers.
What are the two main types of economies discussed?
Market economies and planned economies.
Describe a market economy.
An economy organized around markets, where prices provide incentives instead of central planning.
Describe a planned economy.
An economy organized around central plans, where a central planner determines production and allocation.
What is equilibrium in a market?
A market is in equilibrium when the quantity supplied equals the quantity demanded.
What is the equilibrium price?
The price at which the quantity supplied equals the quantity demanded.
What is the equilibrium quantity?
The quantity of goods bought and sold at the equilibrium price.
What happens when the price is below equilibrium?
A shortage occurs, leading to an increase in price until equilibrium is reached.
What happens when the price is above equilibrium?
A surplus occurs, leading to a decrease in price until equilibrium is reached.
What are the building blocks of market analysis?
Market demand and supply curves.
Define a shortage.
When the quantity demanded exceeds the quantity supplied at a given price.
Define a surplus.
When the quantity supplied exceeds the quantity demanded at a given price.
How do prices in a market economy provide incentives?
Higher prices incentivize producers to supply more, while lower prices incentivize consumers to buy more.
What causes the demand curve to shift?
Changes in income, preferences, prices of related goods, expectations, congestion and network effects, and the type and number of buyers.
What causes the supply curve to shift?
Changes in input prices, productivity and technology, other opportunities and prices of related outputs, expectations, and the type and number of sellers.
Describe the effect of an increase in demand on equilibrium price and quantity.
An increase in demand shifts the demand curve to the right, leading to a higher equilibrium price and a larger equilibrium quantity.
Describe the effect of a decrease in demand on equilibrium price and quantity.
A decrease in demand shifts the demand curve to the left, leading to a lower equilibrium price and a smaller equilibrium quantity.
Describe the effect of an increase in supply on equilibrium price and quantity.
An increase in supply shifts the supply curve to the right, leading to a lower equilibrium price and a larger equilibrium quantity.
Describe the effect of a decrease in supply on equilibrium price and quantity.
A decrease in supply shifts the supply curve to the left, leading to a higher equilibrium price and a smaller equilibrium quantity.
What are the three symptoms of a market out of equilibrium, also known as disequilibrium?
- Queueing.
- Bundling of extras.
- A secondary market.
How can you tell if a market is in equilibrium?
If the price is not changing, indicating that quantity supplied equals quantity demanded.
Explain how the morning-evening method helps analyze shifts in supply and demand.
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.
what does it mean if prices and quantities move in the same direction?
The demand curve has definitely shifted.
what does it mean if prices and quantities move in opposite directions?
The supply curve has definitely shifted.
Why is water cheap despite being essential?
Because the supply of water is plentiful and cheap to produce, offsetting its high demand due to essentiality.
Why are diamonds expensive despite not being essential?
Because diamonds are scarce and expensive to mine, offsetting their demand.
How do markets move towards equilibrium when there is a shortage?
Prices rise, incentivizing suppliers to increase supply and reducing demand until equilibrium is reached.
How do markets move towards equilibrium when there is a surplus?
Prices fall, incentivizing suppliers to decrease supply and increasing demand until equilibrium is reached.
Give an example of a market where supply cannot adjust to eliminate a shortage.
Parking spots during busy times.
Explain how simultaneous shifts in supply and demand can affect equilibrium.
The overall effect on price depends on which shift is larger; quantity usually changes based on the direction of shifts.
What is the effect of an increase in both supply and demand on equilibrium price and quantity?
Price effect is unclear; quantity increases.
What is the effect of an increase in supply and a decrease in demand on equilibrium price and quantity?
Equilibrium Price: Decreases (definite effect)
Equilibrium Quantity: Ambiguous (depends on the relative magnitudes of the shifts)
What is the effect of a decrease in supply and an increase in demand on equilibrium price and quantity?
Equilibrium Price: Increases (definite effect)
Equilibrium Quantity: Ambiguous (depends on the relative magnitudes of the shifts)
What is the effect of a decrease in both supply and demand on equilibrium price and quantity?
Equilibrium Price: Ambiguous (depends on the relative magnitudes of the shifts)
Equilibrium Quantity: Decreases (definite effect)
List factors that shift the demand curve.
Income changes, preferences, prices of related goods, expectations, congestion and network effects, type and number of buyers.
List factors that shift the supply curve.
Input prices, productivity and technology, other opportunities and prices of related outputs, expectations, type and number of sellers.
How do changes in income affect demand for normal and inferior goods?
Income increases demand for normal goods and decreases demand for inferior goods.
Explain the difference between the marginal benefit curve and the total benefit.
The marginal benefit curve represents the benefit of an additional unit, while total benefit is the sum of all benefits.
Why is the willingness to pay for the marginal litre of water low despite its total benefit being high?
Because the marginal benefit of an additional litre is low.
Explain how the price signal works in a market economy.
The price reflects supply and demand, signaling producers to supply more or less and consumers to buy more or less.
Describe a real-world example of a supply shift due to technology.
Lowering the cost of batteries for hybrid cars increases supply, leading to lower prices and higher quantities.
Describe a real-world example of a demand shift due to preferences.
The ALS ice bucket challenge increases demand for ALS medical research funds, leading to higher price and quantity.
Explain the impact of a decrease in supply and an increase in demand using the gas market example from 2008.
The equilibrium quantity falls; price is unclear due to opposing shifts.
How did 9/11 affect the market for New York office space?
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.
What is a secondary market?
A market where goods are resold, often at prices different from the original market.
How does a change in price affect demand and supply curves?
A change in price causes a movement along the demand or supply curve, not a shift of the curve.
What are normal goods?
Goods for which demand increases as income increases.
What are inferior goods?
Goods for which demand decreases as income increases.
How do prices act as profit signals for firms?
Higher prices indicate higher demand, signaling firms to produce more to earn higher profits.
What happens to the equilibrium price and quantity when demand increases and supply remains unchanged?
Equilibrium price increases and equilibrium quantity increases.
What happens to the equilibrium price and quantity when supply increases and demand remains unchanged?
Equilibrium price decreases and equilibrium quantity increases.
What role do consumers play in the labour market?
Consumers can be suppliers in the labour market, selling their labor for wages.
What role do businesses play in the labour market?
Businesses can be buyers in the labour market, buying labor from workers.
How can external factors like weather affect market equilibrium?
They can shift demand or supply curves, leading to changes in equilibrium price and quantity.
Explain the concept of ‘marginal’ in economics.
Marginal refers to the additional benefit or cost of consuming or producing one more unit of a good.
Why might prices remain unchanged even when both supply and demand increase?
If the increase in supply and demand are roughly equal, they can offset each other’s effect on price.
What is the ‘morning-evening’ method?
A technique to analyze simultaneous shifts in supply and demand by considering one shift at a time and then combining the effects.
How do secondary markets help resolve shortages or surpluses?
They allow buyers and sellers to trade at different prices, helping to balance supply and demand.
What is the difference between movement along a curve and a shift of the curve?
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.
Why is equilibrium important in economic analysis?
It determines the price and quantity at which supply equals demand, providing a stable market condition.
How do expectations influence demand and supply?
Expectations about future prices or availability can shift demand and supply curves based on anticipated changes.
Give an example of how congestion can affect demand.
Increased traffic congestion may reduce the demand for driving, shifting the demand curve for cars to the left.
Explain network effects in the context of markets.
Network effects occur when the value of a product increases as more people use it, shifting the demand curve to the right.
