Market Mechanism

Question 1

Equilibirum Market

Answer 1

The point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied.

Question 2

Price Mechanism

Answer 2

The way in which price changes affect quantity demanded and quantity supplied, thus determining scarce resesource allocation in a market.

Question 3

Shortage occurs when (2)

Answer 3

Increase in demand
Decrease in supply

Question 4

3 functions of the price mechanism

Answer 4

1. signaling (WHAT)
2. incentives (HOW)
3. rationing (FOR WHOM)

Question 5

Signaling

Answer 5

information is provided to consumers and producers about what should be consumed and produced. WHAT

Question 6

What does it signals producers and consumers when there is a shortage

Answer 6

A shortage makes prices rise
Consumers –> less
Producers –> more

Question 7

Wha does it signal producers and consumers when there is a surplus

Answer 7

surplus makes prices decline
consumers –> more
Producers –> less

Question 8

Why prices are an incentive to reallocate resources

Answer 8

Asuumprion that consumers and producers are rational and that they will behave according to the laws of demand and supply.

Question 9

Incentive function

Answer 9

HOW
The function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market.
It brings the market back to equilibrium

Question 10

What incentive does higher prices give to consumers and producers

Answer 10

Consumers –> maximize utility so buy less of it
Producers –> maximize profits so produce more. of it

Question 11

Rationing

Answer 11

The function of the price mechanism where the economic question of ‘for whom’ is determined
Prices help to ration scarce resources

Question 12

How are resources rationed when prices are high

Answer 12

Prices are high because shortage
low supply will be given to those consumers who are willing and able to pay

Question 13

Efficiency

Answer 13

Efficiency refers to improved resource use. It is where a firm can produce the same good, but with fewer resources.

Question 14

Allocative Efficiency

Answer 14

Producing the optimal combination of goods from a society’s point of view; achieved when the economy is allocating resources so that no one can be better off without making somebody else worse off.
‘what to produce’
MSC=MSB

Question 15

Productive efficiency

Answer 15

refers to producing goods by using the fewest possible resources, which implies producing at the lowest possible cost it is nececary for allocative efficiency
‘How to produce’

Question 16

Community Surplus

Answer 16

The sum of the consumer surplus and producer surplus; the total benefit gained by society when the market is at equilibrium.

Question 17

Consumer surplus

Answer 17

The difference between the price that consumers pay and the price that they are willing to pay. It is the extra benefit consumers receive for paying a lower price than the one they were prepared to pay.

Question 18

the consumer surplus is larger when

Answer 18

the prices are lower
competition in free markets is an advantage because t lowers the prices

Question 19

Producer surplus

Answer 19

The difference between the price producers are willing and able to sell it and the price earned from selling the good at the market price.

Question 20

there is allocative efficiency when

Answer 20

the market is in equilibrium
social surplus is maximized
most efficient way from societys pount of view

Question 21

Under what assumtion allocative efficiency could be achieved

Answer 21

both consumers and producers are making perfectly rational choices and have perfect information about their own utility and costs.

Question 22

rational behavior

Answer 22

economic theory, behaviour of a consumer or producer that seeks to maximise utility or profit, respectively; behaviour that exhibits stable preferences over time.

Question 23

4 assumptions of rational consumers

Answer 23

1. prefer goods that are stable and transive over time
2. have analytical skills in terms of costs and utiliy
   3.perfect information
3. maximizes utility

Question 24

Dual process model

Answer 24

A theory of human thinking that proposes that people have two broad ways of thinking, often called System 1 and System 2. System 1 thinking comes automatically, with little effort and little or no control. System 2 thinking is conscious, reasoned, and deliberate.

Question 25

Cognitive biases

Answer 25

A way that human thinking and decision-making deviates from rationality.

Question 26

heuristic

Answer 26

An approach to solving a problem that uses a practical method that may not be particularly rational, but is sufficient to reach a goal.

Question 27

Anchoring

Answer 27

Tendency to rely to heavily on the first piece of information given, therefore influencing the perception of the next information given

Question 28

Framing

Answer 28

form of cognitive bias where human thinking and decision-making is affected by the way in which a problem is stated, or framed.

Question 29

Availability

Answer 29

A mental shortcut that relies on immediate examples that come to a given person’s mind when evaluating a specific topic, concept, method or decision.

Question 30

Bounded rationallity

Answer 30

The idea that human rationality is limited in predictable ways.

Question 31

Consumers maximize marginal utility when

Answer 31

marginal utility = 0
then, it begins to decline

Question 32

Bounded self control

Answer 32

The idea that human beings have some self-control, but that it is limited.

Question 33

Hyperbolic discounting

Answer 33

The tendency for people to increasingly choose a smaller-sooner reward over a larger-later reward as the delay occurs sooner rather than later in time.

Question 34

Bounded selfishness

Answer 34

The idea that human beings, while somewhat selfish, also act as conditional cooperators.

Question 35

Choice arquitecture

Answer 35

The way choices are structured for consumers.

Question 36

Default choice

Answer 36

A situation where an option is automatically set for consumers, but that they can change it if they wish.

Question 37

nudge

Answer 37

Any arrangement of the choice architecture that alters people’s choices without limiting choices or significantly changing incentives.

Question 38

profit maximization

Answer 38

The process by which a firm determines the price, input, and output levels that result in the highest profit.