Chapter 2

Question 1

How can market activity be explained?

Answer 1

by the basic goals of utility maximization, profit maximization and welfare maximization

Question 2

how are our economic interactions necessitated?

Answer 2

• Our absolute ability as individuals to produce all the things we need or desire
• The limited amount of time, energy, and resources we have for producing those things we could make for ourselves

Question 3

what are the two types of market?

Answer 3

• factor market

- product market

Question 4

any place where factors of production are bought and sold

Answer 4

factor market

Question 5

any place where finished goods and services (products) are bought and sold

Answer 5

product market

Question 6

what are some services that the government supplies?

Answer 6

education, national defense, highways and elementary schools

Question 7

the most desired goods or services that are forgone in order to obtain something else

Answer 7

opportunity cost

Question 8

refers to a place or situation where an economic situation occurs

Answer 8

market

Question 9

the ability and willingness to sell (produce) specific quantities of a good

Answer 9

supply

Question 10

the seller is on which side of the market?

Answer 10

supply

Question 11

the ability and willingness to buy specific quantities of a good

Answer 11

demand

Question 12

the buyer is on which side of the market

Answer 12

demand

Question 13

a table showing the quantities of a good a consumer is willing and able to buy

Answer 13

demand schedule

Question 14

a curve describing the quantities of a good a consumer is willing and able to buy

Answer 14

demand curve

Question 15

the quantity of a good demanded in a given time period increases as its price falls

Answer 15

Law of Demand

Question 16

What are the determinants of market demand?

Answer 16

• Tastes (desire for this and other goods)
• Income (of the consumer)
• Other Goods (their availability and price)
• Expectations (for income, price, tastes)
• Number of buyers

Question 17

goods that substitute for each other; when the price of good x rises, the demand for good y increases

Answer 17

substitute goods

Question 18

goods frequently consumed in combination; when the price of good x rises, the demand for good y falls

Answer 18

complementary goods

Question 19

the assumption of nothing else changing

Answer 19

Ceteris Paribus

Question 20

what is the difference between a demand movement and a demand shift?

Answer 20

• Movements along a curve can be a response to a price change
• Shifts occur when determinants of the demand change

Question 21

what can cause a demand movement?

Answer 21

Changes in quantity demanded: movements along a given demand curve in response to price changes of that good

Question 22

what causes a demand shift?

Answer 22

Changes in demand: shifts of the demand curve due to changes in taste, income, other goods or expectations

Question 23

the total quantities of a good or service people are willing and able to buy at alternative prices in a given time period; the sum of individual demands

Answer 23

market demand

Question 24

the total quantities of a good that sellers are willing and able to sell

Answer 24

market supply

Question 25

what are the determinants of market supply?

Answer 25

- Technology - factor cost - taxes and subsidies - expectations - number of sellers - other goods

Question 26

the quantity of a good supplied in a given time period increases as its price increases

Answer 26

Law of Supply

Question 27

how can you determine the difference between movements and shifts of supply?

Answer 27

- Changes in quantity supplied: movements along a given supply curve - Changes in supply: shifts of the supply curve

Question 28

what happens if ceteris paribus is violated?

Answer 28

the curve will shift

Question 29

the price at which the quantity of a good demanded equals the quantity supplied

Answer 29

Equilibrium

Question 30

Where does equilibrium occur?

Answer 30

at the intersection of the supply and demand curves

Question 31

the use of market prices and sales to signal desired outputs

Answer 31

market mechanism

Question 32

lower limit set for the price of a good (minimum price for services)

Answer 32

price floor

Question 33

the amount by which the quantity supplied exceeds the quantity demanded at a given price; excess supply

Answer 33

market surplus

Question 34

the amount by which the quantity demanded exceeds the quantity supplied at a given price; excess demand

Answer 34

market shortage

Question 35

an upper limit imposed on the price of a good

Answer 35

price ceiling

Question 36

what are three predictable effects of the price ceiling?

Answer 36

- Increase the quantity demanded - Decrease the quantity supplied - Create a market shortage