Unit Two

Question 1

Homogenous

Answer 1

Products that are exactly the same (ex. salt, gold)

Question 2

Heterogenous

Answer 2

Products that are differentiated (ex. Coke v Pepsi)

Question 3

How do you know if a market is competitive

Answer 3

People could buy elsewhere

Price starts to hover around a certain value

Question 4

Why do competitive markets work

Answer 4

Many buyers and sellers
Product is the same
Information known by all

Question 5

Supply and demand graph (key factors)

Answer 5

Price is on the y axis, quantity is on the x axis
Quantity is dependent on price
Slope = run/rise

Question 6

Endogenous variable

Answer 6

A variable that is inside the model (ex. price)

Question 7

Exogenous variable

Answer 7

A variable that is outside the model (ex. technology)

Question 8

What determines the value of a good

Answer 8

Quality
How much people want it
Scarcity
Competition
Production costs
Need
Process

Question 9

Quantity demanded

Answer 9

The amount consumers are willing and able to purchase at a given price
Quantity demanded and price have a negative relationship

Question 10

Demand curve

Answer 10

Price on y axis, quantity on x axis, demand = downward sloping line

Question 11

Law of demand

Answer 11

Quantity demanded decreases when price increases

Quantity demanded increases when price decreases

Question 12

Why the demand curve is downward sloping

Answer 12

Income effect, substitution effect, marginal utility per dollar

Question 13

Income effect

Answer 13

As prices rise, consumers can not afford to buy as much

Question 14

Substitution effect

Answer 14

As prices rise, consumers buy substitutes

Question 15

Marginal utility per dollar

Answer 15

As prices rise, consumers can get less marginal utility per dollar (value)

Question 16

Determinants of demand

Answer 16

Non-price things affect people’s willingness and ability to pay (exogenous variables)
Things that will shift the demand curve
Changes in preferences, income, population, substitute goods, complements, expectations of consumers

Question 17

Shifts in quantity demanded

Answer 17

Caused by change in price (usually due to a shift in supply)

Go from one point on the demand curve to another point on the demand curve

Question 18

Shifts in demand

Answer 18

Caused by determinant (from list)

Whole line of demand shifts to the right or left

Question 19

Quantity supplied

Answer 19

The amount producers are willing and able to produce and sell at a given price
Quantity supplied and price have a positive relationship

Question 20

Supply curve

Answer 20

Price on y axis, quantity supplied on x axis, upward sloping line

Question 21

Law of supply

Answer 21

Quantity supplied increases when price increases

Quantity supplied decreases when price decreases

Question 22

Determinants of supply

Answer 22

Non-price things that encourage/discourage suppliers (exogenous variables)
Change in technology, input prices (marginal cost), producer expectations, prices of other goods, government policies (subsidies), number of suppliers, the production of a jointly-produced good (ex. beef and leather)

Question 23

Subsidy

Answer 23

Financial assistance to a business

Most subsidies are given by the government (corn, education, etc.)

Question 24

Tax

Answer 24

Increase price, sin tax

Question 25

Shifts in quantity supplied

Answer 25

Caused by change in price (usually due to a shift in demand) Endogenous Goes from one point on the supply curve to another point on the supply curve

Question 26

Shifts in supply

Answer 26

Caused by determinant Exogenous Entire supply line moves left or right

Question 27

Equilibrium

Answer 27

The point where supply = demand is known as the equilibrium This point corresponds to the "equilibrium price" and "equilibrium quantity" The equilibrium price and equilibrium quantity are socially optimal/allocatively efficient At equilibrium quantity, quantity demanded = quantity supplied

Question 28

Socially optimal

Answer 28

Best for society, can sell and buy goods at equilibrium price

Question 29

Allocatively efficient

Answer 29

Resources distributed and used without waste, supply = demand, perfect amount of good

Question 30

In a free market

Answer 30

If quantity supplied is greater than quantity demanded then price will fall until it hits equilibrium If quantity demanded is greater than quantity supplied then price will rise until it hits equilibrium

Question 31

Synonyms for equilibrium price

Answer 31

Market clearing price Market price Socially optimal price

Question 32

Shifts

Answer 32

Any shift in supply and/or demand can change the equilibrium price and/or quantity A shift in supply causes a change in quantity demanded (and vice versa)

Question 33

Increase

Answer 33

Rightward shift

Question 34

Substitutes

Answer 34

Two goods that provide similar purpose or utility (ex. nalgene and camelbak)

Question 35

Complements

Answer 35

Two goods that are consumed together (ex. peanut butter and jelly)

Question 36

Normal good

Answer 36

Any good for which consumption increases as people's income increases (ex. fresh fruit)

Question 37

Inferior good

Answer 37

Any good for which consumption increases as people's income decreases (ex. Ramen)

Question 38

Joint production

Answer 38

Two goods that are produced together Usually a function of a byproduct Ex. sugar and molasses, beef and leather Quantity supplied of one good increases —> supply of the other good increases

Question 39

Giffen good

Answer 39

A good where consumption increases as price rises, defies law of demand If price goes up so does quantity demanded, because the income effect > substitution effect

Question 40

Synonym for indeterminate

Answer 40

Ambiguous

Question 41

Increase in demand, increase in supply

Answer 41

Price ambiguous, quantity increase

Question 42

Demand increase, supply decrease

Answer 42

Price increase, quantity ambiguous

Question 43

Demand decrease, supply increase

Answer 43

Price decrease, quantity ambiguous

Question 44

Demand increase, supply decrease

Answer 44

Price indeterminate, quantity decrease