Unit 1 - Chapter 5 (and Chapter 7)

Question 1

Competitive market

Answer 1

A market in which the large number of buyers and sellers possess good market information and easily enter or leave the market.

Question 2

Equilibrium

Answer 2

A state of rest or balance between opposing forces.

Question 3

Market equilibrium

Answer 3

When planned demand equals planned supply in the market.

Question 4

Excess supply

Answer 4

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price.

Question 5

Market disequilibrium

Answer 5

When the market fails to clear. The market plans of consumers and firms are inconsistent with each other.

Question 6

Excess demand

Answer 6

When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price.

Question 7

A market is in disequilibrium when

Answer 7

1) planned demand < planned supply (price falls)

2) planned demand > planned supply (price rises)

Question 8

Functions price perform in the economy

Answer 8

1) signalling function
2) incentive function
3) rationing or allocative function

Question 9

Signalling function

Answer 9

Prices provide information to buyers and sellers.

Question 10

Incentive function

Answer 10

Prices create incentives for consumers and firms to behave in certain ways.

Question 11

Rationing or allocative function

Answer 11

Prices allocate scarce resources between competing uses.

Question 12

Speculation

Answer 12

Occurs when people buy or sell a good or service because they believe the price is going to rise or fall in the future. Successful speculation means people benefit from capital gains or avoid capital losses.