Chapter 3

Question 1

What is a market economy?

Answer 1

Resources are allocated among households and firms with little or no government interference

Question 2

How do producers earn a living?

Answer 2

By selling the products that consumers want.

Question 3

What is a competitive market?

Answer 3

Exists when there are so many buyers and sellers that each has only a small impact on the market price and output.

Question 4

What is an imperfect market?

Answer 4

One in which either the buyer or the seller has an influence on the market price.

Question 5

What is a monopoly?

Answer 5

Exists when a single company supplies the entire market for a particular good or serbice

Question 6

What is the Law of Demand?

Answer 6

An inverse relationship between price and quantity demanded. Quantity demanded falls when prices rise and it rises when prices fall.

Question 7

What is market demand?

Answer 7

The sum of all the individual quantities demanded by each buyer in the market at each price.

Question 8

What does a price change cause in regards to the demand curve?

Answer 8

A price change causes movement ALONG a given demand curve, but it cannot cause a shift in the demand curve.

Question 9

What variables can shift demand?

Answer 9

1. Taste and preferences.
2. Changes in buyer’s income
3. Price of related goods
4. Expectations regarding the future price
5. Number of buyers

Question 10

What happens when a consumer has a change in income?

Answer 10

• Consumers buy more of a normal good when their income rises.
• Consumers buy more of an inferior good as income falls (out of necessity).

Question 11

What are Complementary Goods?

Answer 11

Two goods that are used together.

-when the price of a complementary good rises, demand for a related good decreases.

Question 12

When can shifts in demand happen?

Answer 12

When an outside event influences human behavior.

Question 13

What is quantity supplied?

Answer 13

The amount of a good or service that producers are willing and able to sell at the current price.

Question 14

What is the Law of Supply?

Answer 14

All other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of the good falls.

Question 15

What is market supply?

Answer 15

The sum of the quantities supplied by each seller in the market at each price.

Question 16

What does not cause a shift in supply?

Answer 16

Price! A price change causes movement along the supply curve, not a shift in the supply curve.

Question 17

What factors can shift the supply curve?

Answer 17

• Cost of inputs
• Changes in technology
• Changes in the production process (e.g. more/less efficient)
• Taxes
• Subsidies

Question 18

What are inputs?

Answer 18

Resources used in the production process

Question 19

What are examples of inputs?

Answer 19

• Workers
• Equipment
• Raw Material
• Buildings
• Capital

Question 20

When does equilibrium occur?

Answer 20

The point where the demand curve and the supply curve intersect.

Question 21

What is the equilibrium price?

Answer 21

The price at which the quantity supplied is equal to the quantity demanded. This is also known as the market-clearing price.

Question 22

What is the Law of Supply and Demand?

Answer 22

The amount at which the quantity supplied is equal to the quantity demanded.

Question 23

When does a shortage occur?

Answer 23

Whenever the quantity supplied is less than the quantity demanded.

Question 24

When does a surplus occur?

Answer 24

Whenever the quantity supplied is greater than the quantity demanded.

Question 25

What happens when demand increases, but supply does not change?

Answer 25

The demand curve shifts to the right and the equilibrium price increases.

Question 26

What happens when supply increases, but demand does not change?

Answer 26

The supply curve shifts to the right, and the equilibrium price decreases.

Question 27

What happens when demand decreases, but supply does not change?

Answer 27

The demand curve shifts to the left and the equilibrium price decreases.

Question 28

What happens when supply decreases, but demand does not change?

Answer 28

The supply curve shifts to the left, and equilibrium price increases.