Week 2

Question 1

What is a market?

Answer 1

A market is a place where buyers and sellers trade some good or service.

Question 2

What is demand?

Answer 2

The quantity of a good or service that households want (and have the means) to purchase in a given period of time. It describes the behavior of households and answers the question “How much of a particular good or service do households purchase in a given period of time?”

Question 3

What is supply?

Answer 3

The quantity of a good or service that firms want (and have the ability) to sell in a given period of time.

Question 4

What is equilibrium?

Answer 4

The market condition in which the interaction of buyers and sellers finds a particular price and quantity to be traded and from which there is no incentive to move.

Question 5

What is the Law of Demand?

Answer 5

An increase in the price of the demand typically leads to a reduction in the quantity of that good demanded. In other words, as the price of a good or service increases, the quantity purchased generally decreases.

Question 6

What is a complementary good?

Answer 6

Two goods for which a decrease in the price of one leads to an increase in the demand for the other, and vise versa.

Question 7

What is a substitute good?

Answer 7

Two goods for which an increase in the price of one good leads to an increase in the demand for the other.

Question 8

What is a normal good?

Answer 8

Any good for which the demand increases as income increases.

Question 9

What is an inferior good?

Answer 9

Any good for which the demand decreases as income increases.

Question 10

What are the components, or determinants, of demand for a product?

Answer 10

Price of good, substitute goods, complementary goods, tastes and preferences, consumer’s income, and expectations about the future.

Question 11

What is a demand function?

Answer 11

A mathematical relationship that predicts the quantity of a good demanded as a function of several related factors.

Question 12

What is the demand curve?

Answer 12

The graphical relationship between the price of a good and the quantity demanded, ceteris paribus. Demand curve is downward sloping. Hold constant all of the other factors that influence household behavior.

Question 13

What is a demand schedule?

Answer 13

A set of data showing the relationship between price and quantity demanded, ceteris paribus.

Question 14

What is the substitution effect?

Answer 14

The reduction in quantity demanded due to increasing relative prices.

Question 15

What is the income effect?

Answer 15

The reduction in quantity demanded due to decreasing wealth.

Question 16

Items that go together:

Answer 16

A change in quantity demanded and a movement along the demand curve.

Question 17

On a demand curve:

Answer 17

All non-price determinants are held constant.

Question 18

What does change in quantity demanded mean?

Answer 18

When there is a change in price, the quantity demanded moves along the existing demand curve.

Question 19

What does change in demand mean?

Answer 19

A change in a variable previously held constant causes a new demand curve and demand schedule.

Question 20

If the population of a market area increases:

Answer 20

Demand in the market will increase and the supply side of the market is not affected.

Question 21

If the price of bread falls from $3.00 per loaf to $1.50 per loaf:

Answer 21

Households will demand a greater quantity of bread. A change in price will not cause the demand curve to shift.

Question 22

What is an example of a factor that will increase the demand for a product?

Answer 22

A favorable change in consumers’ tastes.

Question 23

What is profit?

Answer 23

The difference between the revenue you earn selling bread and the costs you incur making the bread and offering it for sale. When profits get larger, you respond by offering more bread for sale in any given period of time.

Question 24

Determinants of supply: Factor influencing supply through impact on revenue

Answer 24

Price

Question 25

Determinants of supply: Factors influencing supply through impact on cost

Answer 25

Price of inputs, Technology, Government taxes and subsidies, Expectations

Question 26

What is the supply function?

Answer 26

It is a mathematical relationship that predicts the quantity of a good supplied as a function of each of the factors that influence supplier behavior.
Qs = S(P, Pi, T, G, Ex)

Question 27

What is the relationship between price and quantity supplied?

Answer 27

It is a positive relationship. The supply curve slopes upward. Therefore price and quantity supplied have a positive, or direct, relationship.

Question 28

If a producer of bread thinks that the price of bread will fall next week, the producer will:

Answer 28

Sell all the bread this week if possible. The seller will try to get more money for the bread.

Question 29

What is a supply schedule?

Answer 29

A set of data showing the relationship between price and quantity supplied, ceteris paribus.

Question 30

What is a supply curve?

Answer 30

The graphical relationship between the price of a good and the quantity supplied, ceteris paribus. Supply curve slopes upward because of increasing opportunity costs.

Question 31

What is the Law of Supply?

Answer 31

As the price of a good or service increases, the quantity offered for sale generally increases.

Question 32

Low vs. High opportunity costs:

Answer 32

Low: fewer ‘loaves of bread’ instead unimportant opportunity cost.
High: Many ‘loaves of bread’ instead of family, vacation, or something important.

Question 33

If input prices rise, what affect does it have on the supply curve?

Answer 33

It shifts the curve inward if input prices rise, and vise versa with the curve shifting outward.

Question 34

What is market supply?

Answer 34

Market supply is a horizontal summation of all of the individual supply curves in the market. In order to find the market supply, you must add together individual supply schedules. Anything that shifts individual supply will shift the market supply.

Question 35

What is the Competitive Equilibrium?

Answer 35

It is what happens when you get together a bunch of buyers and sellers, all of whom believe, that they have no influence over the price. When quantity supplied is equal to quantity demanded. The place where the supply and demand curves intersect.

Question 36

What is Equilibrium?

Answer 36

It is a situation in which neither consumers or firms have any incentive to change their behavior.

Question 37

What is the price where we can find Equilibrium?

Answer 37

It is the price where there is an equal amount of quantity demanded and supplied throughout the market between the buyers and sellers.

Question 38

What is Excess Demand, or Shortage?

Answer 38

It is the difference between quantity demanded and quantity supplied when consumers demand a greater quantity than producers are willing and able to supply.

Question 39

What is Bidding Mechanism?

Answer 39

It is the process by which unsatisfied buyers try to change the price of a good in order to guarantee that they are able to obtain it.

Question 40

What is Excess Supply, or Surplus?

Answer 40

The difference between quantity supplied and quantity demanded when producers supply a greater quantity than consumers are willing to buy.

Question 41

What is the first step to finding a new equilibrium?

Answer 41

Identify which side of the market is affected. Buyers or sellers?

Question 42

What is the second step to finding a new equilibrium?

Answer 42

How does the change affect the curve? Shift inward or outward?

Question 43

What is the third step to finding a new equilibrium?

Answer 43

How does the equilibrium change? Will bidding go up or down?

Question 44

What does Comparative Statics mean?

Answer 44

Comparing one state of competitive equilibrium to another when one of the variables affecting demand or supply changes.

Question 45

What are the 4 possible comparative statics exercises?

Answer 45

1) increase in demand
2) decrease in demand
3) increase in supply
4) decrease in supply