Understanding Markets 2

Question 1

A market is …

Answer 1

an arrangement through which buyers and sellers make transactions

Question 2

What are the sides to a market?

Answer 2

Demand and supply

Question 3

What are the 4 market dimensions?

Answer 3

Location - may not be a specific geographic location

Price - unit price

Quantity

Time

Question 4

What is demand in a product market?

Answer 4

amount that consumers

(households) want to buy over a given period in time

Question 5

What 4 factors affect demand

Answer 5

– The product’s own price
– The price of other products
– Household incomes
– Consumer tastes/preferences

Question 6

What is the ceteris paribus assumption

Answer 6

examine changes in each

factor, assuming other factors do not change

Question 7

What happens to the demand curve of product A if household incomes rise?

Answer 7

Shifts right

Question 8

In a product market, supply is

Answer 8

the amount that producers

(firms) want to sell over a given period in time

Question 9

Supply depends on what 3 factors

Answer 9

• The product’s own price
  – Production costs and technology
  – The number of firms operating in the market

Question 10

What happens to the supply curve if the wage costs fall?

Answer 10

Shifts right

Question 11

What happens at equilibrium price?

Answer 11

Everyone who wants to buy the good at that price can find a seller willing to sell it

Question 12

At the equilibrium quantity, firms can

Answer 12

find a buyer willing to

pay the marginal cost for everything they are producing

Question 13

What happens to price and quantity when something affecting demand changes?

Answer 13

Price and quantity change in the same direction

Question 14

What happens to price and quantity when something affecting supply changes>

Answer 14

Price and quantity change in opposite directions

Question 15

Own-price elasticity of demand is

Answer 15

A relative measure of how quantity responds to price changes

Question 16

How to calculate own-price elasticity of demand

Answer 16

%change in quantity demanded/ %change in price

Question 17

How does the relationship between quantity and price change in elastic demand?

Answer 17

%change in quantity is greater than %change in price

Question 18

How does the relationship between quantity and price change in inelastic demand?

Answer 18

%change in quantity is less than %change in price

Question 19

How does the relationship between quantity and price change in unit elasticity?

Answer 19

%change in quantity equals %change in price

Question 20

What does inelastic demand imply?

Answer 20

A big change in price leads to

a small change in the quantity demanded

Question 21

The own-price elasticity is a negative number, because

Answer 21

a change in price leads to a change in demand in the opposite direction

Question 22

Are substitutes positive or negative?

Answer 22

Positive

Question 23

Are complements positive or negative?

Answer 23

Negative

Question 24

%change in quantity supplied over %change in price is always _____

Answer 24

Positive

Question 25

The longer the period of time considered, the greater

Answer 25

the potential responsiveness of supply and demand

Question 26

Why is demand more elastic in the long run?

Answer 26

consumers can adjust their behaviour and switch to alternative products

Question 27

Why is supply more elastic in the long run?

Answer 27

new firms can enter the market, existing firms can adjust their capacity or leave the market

Question 28

The short run is a period during which

Answer 28

the number of firms

operating in the market is fixed

Question 29

How do firms operate in the short run?

Answer 29

with fixed capital capacity

and given technology

Question 30

How can firms adjust production in the short run?

Answer 30

Employing more or fewer workers

Question 31

The long run is a period during which

Answer 31

existing firms can alter capacity, technology can change and firms can enter and leave the industry