Chapter 2 Flashcards
(29 cards)
Any arrangement that brings together buyers and sellers.
Markets determine prices and availability of goods and services through buyer-seller interactions.
What is a Market?
The horizontal summation of individual consumers’ demand curves.
It represents the total quantity demanded by all consumers at various prices.
What is the Market Demand Curve?
The quantity demanded of a good or service is inversely related to its price, assuming all other factors remain constant (ceteris paribus).
This is typically represented by a downward-sloping demand curve.
What does the Law of Demand state?
The phenomenon where a product’s price decline increases a buyer’s real purchasing power.
It influences a buyer’s ability to purchase based on price changes.
What is the Income Effect?
When real purchasing power remains unchanged, an increase in a good’s price causes buyers to shift their purchases to less expensive substitutes.
This effect reinforces the income effect.
What is the Substitution Effect?
Factors other than the price of the good that affect market demand, including:
* Money income
* Tastes and preferences
* Prices of related goods
* Number of consumers
* Price and income expectations
These factors can cause the entire demand curve to shift.
What are Demand Determinants?
Products for which an increase in consumers’ money income will increase demand.
A decrease in money income typically results in fewer purchases.
What are Normal Goods?
A good for which demand varies inversely with consumers’ money income.
Demand for inferior goods declines during economic expansions.
What is an Inferior Good?
Advertising that provides prospective consumers with information about products.
It aims to inform consumers about new or existing products.
What is Informative Advertising?
Advertising that attempts to boost sales by creating an image unrelated to the product’s physical characteristics.
It appeals to consumers’ emotions and can shift the market demand curve rightward.
What is Persuasive Advertising?
Two goods where an increase in the price of one causes consumers to shift purchases to the other.
Examples include Coca-Cola and Pepsi.
What are Substitutes in Consumption?
Goods that are consumed together.
A decrease in the price of one complement can increase demand for the other.
What are Complements in Consumption?
A fixed tax (t) per unit purchased.
It causes a parallel leftward shift of the demand curve when imposed.
What is a Per-Unit Tax?
A tax expressed as a percentage of the purchase price.
It affects the demand curve’s sensitivity to price changes.
What is an Ad Valorem Tax?
The value buyers receive from a good or service beyond the amount paid.
It is represented by the area above the price and below the demand curve.
What is Consumer Surplus?
The quantity supplied of a good is directly related to a change in its market price, assuming all other factors remain constant (ceteris paribus).
Producers are incentivized to supply more as prices increase.
What does the Law of Supply state?
The difference between total revenues from sales and the minimum amount needed to produce.
It reflects the extra revenue beyond production costs.
What is Producer Surplus?
The price (P*) where the quantity demanded (Qd) equals the quantity supplied (Qs).
At equilibrium, there is no shortage or surplus.
What is Market Equilibrium?
The sum of consumer surplus and producer surplus.
It measures market efficiency and societal benefit from production and consumption.
What is Net Social Welfare?
The maximum legal price that a firm can charge for its product.
It must be set below the market equilibrium price to be effective.
What is a Price Ceiling?
The loss to consumers as a whole from the imposition of a price ceiling.
This represents lost consumer surplus due to reduced supply.
What is Consumer Deadweight Loss?
The loss to society from misallocation of resources due to a price ceiling.
This represents lost producer surplus.
What is Producer Deadweight Loss?
The sum of consumer and producer deadweight loss.
It measures lost net social welfare from market interventions.
What is Total Deadweight Loss?
An examination of the price-rationing mechanism of individual markets.
It focuses on a single market in isolation.
What is Partial Equilibrium Analysis?
