Chapter 2

Question 1

Price Takers

Answer 1

Individual buyers and sellers because their contributions are very small, and the decisions made by them have no effect on the market-determined price.

Question 2

Market

Answer 2

Any arrangement that brings together buyers and sellers.

Question 3

Market demand curve

Answer 3

horizontal summation of individual consumers’ demand curves

Question 4

law of demand

Answer 4

the quantity demanded of a good or service is inversely related to its price, ceteris paribus

Question 5

income effect

Answer 5

as a product’s price declines, a buyer’s real purchasing power increases.

Question 6

substitution effect

Answer 6

when there is no real change in real purchasing power, an increase in price of good will cause buyers to unambiguously shift their purchases into a relatively less expensive substitutes

Question 7

Opportunity costs

Answer 7

the substitution effect reflects changes in a consumer’s opportunity costs from the price change

Question 8

normal goods

Answer 8

increase in consumers’ money income will increase demand for most goods and services. likewise, a decrease in money income results in far-fewer purchases and a left-shift of the demand curve

Question 9

inferior goods

Answer 9

the demand for this type of good varies inversely with consumers’ money income; economic expansion = demand shift to the left while bankruptcy = demand shift to the right; i.e. demand for auto repairs and used cars during a recession

Question 10

informative advertising

Answer 10

provides prospective consumers with information about new or existing products

Question 11

persuasive advertising

Answer 11

attempts to boost sales by creating an image that may have little or nothing to do with the product’s physical characteristics; it appeals to consumers’ emotions; increase in ad-inspired purchases = right shift while negative opinion = left shift

Question 12

substitutes in consumption

Answer 12

an increase in the price of y will cause some consumers to shift their purchases into relatively less expensive good x

Question 13

complements in consumption

Answer 13

if they are consumed together, i.e. tennis rackets and tennis balls

Question 14

Consumer Surplus

Answer 14

value that buyers received from the purchase of a good or service in excess of the amount paid.

Question 15

Law of Supply

Answer 15

the quantity supplied of good or service is directly related to a change in its market price, ceteris paribus

Question 16

Substitutes in production

Answer 16

involve trade-offs in the production of two or more goods or services using the same production facilities, such as the choice of producing halogen light bulbs or compact fluorescent light (CFL) bulbs on the same assembly line.

Question 17

Complements in production

Answer 17

Involve the joint production of two or more goods with the same production facilities.

Question 18

Producer Surplus

Answer 18

Analytical supply counterpart to consumer surplus is producer surplus, which is the difference between total revenues received from the sale of a good or service and the minimum needed to produce it.

Question 19

Operating profit

Answer 19

difference between the firm’s total revenue and expenses related to a firm’s total revenue and expenses relating to a firm’s ongoing operations (total variable cost).

Question 20

Market equilibrium

Answer 20

Price where the quantity demanded equals the quantity supplied; Prices below equilibrium price = shortage,

Question 21

Net Social welfare

Answer 21

Sum of consumer surplus and producer surpluses

Question 22

Market structure

Answer 22

The greater the sum of consumer and producer surplus

Question 23

Rationing function of prices

Answer 23

Process by which changes in market-determined prices eliminate shortages and surpluses is referred to as rationing function of prices.

Question 24

Price ceiling

Answer 24

maximum legal price that a firm can charge for its product

Question 25

queuing

Answer 25

non-price rationing mechanism must be used to allocate products that are in short supply

Question 26

price floor

Answer 26

minimum legal price that a supplier can expect for its product

Question 27

Allocating function of prices

Answer 27

demand for productive resources is derived from the demand for final goods and services, producers use price information to reallocate inputs from lower to higher valued uses