Ch 2. Competitive Markets: Demand and Supply

Question 1

Market

Answer 1

Any kind of arrangement where buyers and sellers of a particular good, service or resource are linked together to carry out an exchange

Question 2

Competition

Answer 2

process in which rivals compete in order to achieve some objective

Question 3

Competitive Markets

Answer 3

large numbers of sellers and buyers acting independently, so that no one individual seller of small group of sellers has the ability to control the price of the product sold

Question 4

Demand

Answer 4

Indicates the various quantities of a good that consumers are willing and able to buy at different possible prices during a particular time period, ceteris paribus

Question 5

Demand Curve

Answer 5

Curve showing the relationship between the price of a good and the quantity of the good demanded, ceteris paribus

Question 6

Law of Demand

Answer 6

there is a negative relationship between the price of a good and quantity of the good demanded, over a particular time period, ceteris paribus (as P increases, QD falls, vice versa)

Question 7

Market Demand

Answer 7

Sum of all individual demands for a good

Question 8

Non-price determinants of demand

Answer 8

Variables that can influence demand, and that determine the position of any demand curve, a change in any determinant of demand causes a shift of the demand curve

Question 9

Increase in demand

Answer 9

Rightward shift

Question 10

Decrease in demand

Answer 10

Leftward shift

Question 11

Normal Good

Answer 11

demand for it increases in response to an increase in consumer income

Question 12

Inferior good

Answer 12

Demand falls as consumer income increases

Question 13

Substitute

Answer 13

Two goods that satisfy a similar need

Question 14

Complementary Goods

Answer 14

tend to be used together (ketchup and hotdogs)

Question 15

Quantity Demanded

Answer 15

Movement on the demand curve

Question 16

Utility

Answer 16

Satisfaction that consumers gain from consuming something

Question 17

Law of diminishing marginal utility

Answer 17

As consumption of a good increases, marginal utility, or the extra utility the consumer receives, decreases with each additional unit consumed

Question 18

Substitution Effect

Answer 18

There is an inverse relationship between price and QD

Question 19

Income Effect

Answer 19

As P falls real income increases

Question 20

Supply

Answer 20

Various quantities of a good a firm is willing and able to produce and supply to the market for sale at different possible prices, during a particular time period, ceteris paribus

Question 21

Supply Curve

Answer 21

A curve showing the relationship between the price of a good and the quantity of the good supplied, ceteris paribus

Question 22

Law of Supply

Answer 22

There is a positive relationship between the quantity of a good supplied over a particular time period and its price, ceteris paribus

Question 23

Market Supply

Answer 23

Sum of all individual firms’ supplies for a good.

Question 24

Non-Price Determinants of Supply

Answer 24

The variables that can influence supple, and that determine the position of a supply curve

Question 25

Competitive Supply

Answer 25

2 goods compete with each other for the same resources

Question 26

Join Supply

Answer 26

Production of goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other

Question 27

Subsidy

Answer 27

Payment made to the firm by the government, and so has the opposite effect of a tax

Question 28

Quantity Supplied

Answer 28

Movement on the supply curve

Question 29

Increase in supply

Answer 29

Rightward Shift

Question 30

Decrease in Supply

Answer 30

Leftward Shift

Question 31

Short Run

Answer 31

Time period during which at least one input is fixed and cannot be changed by the firm

Question 32

Long Run

Answer 32

Time period when all inputs can be changed

Question 33

Marginal Product

Answer 33

Extra of additional output produced by one additional unit of a variable input

Question 34

Law of Diminishing Marginal Returns

Answer 34

more units of a variable input are added to one or more fixed inputs, the marginal product of the variable input at first increases, but there comes a point when it begins to decrease

Question 35

Total Cost

Answer 35

all costs of production incurred by a firm

Question 36

Marginal Cost

Answer 36

Extra or additional cost of producing one more unit of output

Question 37

Marginal product and Marginal returns

Answer 37

When marginal product increases, Marginal cost decreases. WHen MP is max, MC is min, when MP falls, MC increases

Question 38

Excess Supply/surplus

Answer 38

Excess of something over something else to which it is being compared

Question 39

Excess demand/ shortage

Answer 39

Amount by which quantity demanded is greater than quantity supplied

Question 40

Equilibrium

Answer 40

State of balance between different forces, such that there is no tendency to change

Question 41

Market Equilibrium

Answer 41

QD = QS

Question 42

Competitive Market Equilibrium

Answer 42

QD = QS, and there is no tendency for the P to change

Question 43

Allocative Efficiency

Answer 43

Producing the quantity of goods mostly wanted by society

Question 44

Marginal Benefit

Answer 44

Extra or additional benefit received from consumer one more unit of a good

Question 45

Consumer Surplus

Answer 45

Defined as the highest price consumers are willing to pray for a good minus the price actually parid

Question 46

Producer Surplus

Answer 46

Price received by firms for selling their good minus the lowest price that they are willing to accept to produce the good

Question 47

Social Surplus

Answer 47

Sum of consumer and producer surplus, it is maximum in a competitive market with no market failures

Question 48

Welfare

Answer 48

amount of consumer and producer surplus. when MB = MC, social welfare is maximum

Question 49

Consumer surplus

Answer 49

((P intercept of D curve - P of consumers) X QPurchased) / 2

Question 50

Producer Surplus

Answer 50

((P of producers - P intercept of S curve) x Q sold) / 2

Question 51

Area of a Trapezium

Answer 51

((a+b) x c) / 2

Question 52

Welfare Loss

Answer 52

Social welfare is no longer maximum on account of a portion of it being lost

Question 53

Rational Consumer Choice

Answer 53

Make choices on what to buy based on assumptions: 1. choices are consistent 2. They have perfect information 3. They try to max utility

Question 54

Biases

Answer 54

Refers to systematic errors in thinking or evaluating

Question 55

Rules of Thumb

Answer 55

guidlines based on experience

Question 56

Anchoring

Answer 56

Use of irrelevant information to make decisions

Question 57

Framing

Answer 57

How choices are presented to decision-makers

Question 58

Availability

Answer 58

Information that is most recently available

Question 59

Bounded Rationality

Answer 59

Consumers are rational only within limits

Question 60

Bounded Self-Control

Answer 60

People in reality exercise self-control only within limits

Question 61

Bounded Selfishness

Answer 61

People are selfish only within limits

Question 62

Nudge

Answer 62

method designed to influence consumers' choices in a predictable way

Question 63

Default Choice

Answer 63

doing the option that results when one does not do anything

Question 64

Restricted Choice

Answer 64

limited by the government or other authority

Question 65

Mandated Choice

Answer 65

Choice between alternatives that is made mandatory by the government or other authority

Question 66

Rational Producer Behavior

Answer 66

firm tries to maximise profit

Question 67

Market Share

Answer 67

Percentage of total sales in a market that is earned by a single firm