Markets

Question 1

Demand

Answer 1

The quantity of a good/service that consumers are willing and able to purchase at various price levels at a given point in time

Question 2

The Law of Demand

Answer 2

As the price of a good/service increases, the quantity demanded decreases

Question 3

Changes in price cause…

Answer 3

Movement along the demand curve

Question 4

Ceteris Paribus

Answer 4

All other things being equal

Question 5

Factors Affecting Demand

Answer 5

The price of the good or service itself

The price of substitute & complementary goods

Expected future prices

Changes in consumer tastes & preferences

The level of consumer income

The size of the population and its age distribution

Question 6

Supply

Answer 6

The quantity of a good/service that businesses are willing and able to offer at various price levels at a given point in time

Question 7

The Law of Supply

Answer 7

as the price of a good/service increases, the quantity supplied increases

Question 8

Changes in price cause…

Answer 8

Movements along the supply curve

Question 9

Factors Affecting Supply

Answer 9

The price of the good or service itself

The price of substitute or complementary goods

The state of technology

Changes in the cost of factors of production

The quantity of the good available

Climatic & Seasonal Influence

Question 10

A Market

Answer 10

Any situation where buyers and sellers are brought into contact to exchange goods & services for payment

Question 11

Equilibirum

Answer 11

A situation where there is no tendency to change (ie. where demand = supply)

Question 12

A Situation of Excess Supply

Answer 12

Sellers will lower the price of goods, resulting in an expansion of demand and a contraction of supply until equilibrium is reached

Question 13

A Situation of Excess Demand

Answer 13

Consumers will bid up the price of goods, resulting in an expansion of supply and contraction of demand until equilibrium is reached

Question 14

Market Failure

Answer 14

The market fails to consider the costs/benefits that the production has on society, and thus fails to set the ‘best’ price and quantity

Question 15

Externalities

Answer 15

The social costs/benefits that arise from the production of a good/service

Question 16

Private Goods

Answer 16

Excludable and have rivalry

Question 17

Public Goods

Answer 17

Non-Excludable & Non-Rival

Question 18

Merit Goods

Answer 18

Goods provided by the government, such as public transport

Question 19

Price Ceiling

Answer 19

The government sets a maximum price

Price is kept below the equilibrium price

Price ceilings benefit consumers

Question 20

Price Floor

Answer 20

A minimum price set by the government

Price is kept above the equilibrium price

It benefits the producers of the good/serve

Question 21

Price Elasticity of Demand

Answer 21

Refers to the responsiveness of the quantity demanded to changes in price

Question 22

Elastic Demand

Answer 22

a strong response to a change in price (if price increases by a small amount quantity demanded decreases by a large amount)

Question 23

Unit Elastic Demand

Answer 23

a proportional response to a price change

Question 24

Inelastic Demand

Answer 24

a weak response to a price change (a large increase in price leads to a small increase in quantity demanded)

Question 25

Factors Affecting Elasticity of Demand

Answer 25

Luxury or Necessity

Existence of Close Substitutes

Proportion of Income Spent on Item

Length of Time since the Price Change

Habit Forming Nature of the Good

Question 26

Price Elasticity of Supply

Answer 26

Measures the responsiveness of the quantity supplied to changes in price

Question 27

Elastic Supply

Answer 27

A small change in price leads to a large change in supply

Question 28

Inelastic Supply

Answer 28

A large change in price leads to a small change in supply

Question 29

Factors Affecting Elasticity of Supply

Answer 29

Time Lags After a Price Change

The Ability to Hold and Store Stock

Excess Capacity

Mobility of Resources

Question 30

Market Power

Answer 30

A business’s ability to raise prices above the equilibrium price

Question 31

Market Concentration

Answer 31

when there is a limited number of firms that exist in the market

Question 32

Price Takers

Answer 32

firms that have very little market power and must accept the market price

Question 33

Price Makers

Answer 33

firms that have strong market power and are able to set the market price above the equilibrium price

Question 34

Pure Competition

Answer 34

Many firms that are small in size

Homogeneous Products

Price Takers

No major barriers to entry

Question 35

Monopolistic Comepetition

Answer 35

Many relatively small firms

Similar products, but attempts to make their products differentiated (advertising)

Some control over their price

Relatively easy entry, with some barriers (regulations, brand loyalty)

Question 36

Oligopoly

Answer 36

A few relatively large firms with significant market share

Usually differentiated products which are heavily advertised

Actions in relation to price & product depend heavily on the actions of competitors (price wars)

High barriers to entry (established brand loyalty, high capital investment required)

Question 37

Monopoly

Answer 37

One firm only, generally large

No close substitutes

Price maker/setter

Advertising is aimed to maintain product image and increase sales

Extremely high barriers to entry