Chapter 3

Question 1

What is a market

Answer 1

A voluntary meeting of buyers and sellers with exchange taking place

Question 2

What is demand

Answer 2

The quantity of a good or service that consumers are willing and able to buy at given prices in a given time period

Question 3

What is supply

Answer 3

The quantity of good or service that producers are willing and able to sell at given prices in a given period of time

Question 4

What are competitive markets

Answer 4

Markets in which the large number of buyers and sellers possess good market information and can easily enter or leave the market

Question 5

What is the ruling market price

Answer 5

The price at which planned demand equals planned supply

Question 6

What is effective demand

Answer 6

The desire for a good or service backed by an ability to pay

Question 7

What is market demand

Answer 7

The quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices

Question 8

What is individual demand

Answer 8

The quantity of a good or service that a particular consumer or individual is willing and able to buy at different market prices

Question 9

What is a condition of demand

Answer 9

A determinant of demand other than the goods own price that fixes the position Of the demand curve

Question 10

What are substitute goods

Answer 10

Alternative goods that could be used for the same purpose

Question 11

What are complementary goods

Answer 11

When two goods are complements they experience joint demand

Question 12

What is a normal good

Answer 12

A good for which demand increases as income rises and demand decreases as income falls

Question 13

What is an inferior good

Answer 13

A good for which demand decreases as income rises and demand increases as income falls

Question 14

What is elasticity

Answer 14

The proportionate responsiveness of a second variable to an initial change in the first variable

Question 15

What is the price elasticity of demand

Answer 15

Measures the extent to which the demand for a good changes in response to a change in the price of that good

Question 16

What is the short run

Answer 16

The time period in which at least one factor of production is fixed and cannot be varied

Question 17

What is the long run

Answer 17

The time period in which no factors of production are fixed and in which all the factors of production can be varied

Question 18

What is income elasticity of demand

Answer 18

Measures the extent to which the demand for a good changes in response to a change income: it is calculated by dividing the percentage change in quantity demanded by the percentage change in income

Question 19

What is cross elasticity of demand

Answer 19

Measures the extent to which the demand for a good changes in response to a change in the price of another good; it is calculated by dividing the percentage change in quantity demanded by the percentage change in the price of another good

Question 20

What is market supply

Answer 20

The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time

Question 21

What is profit

Answer 21

The difference between total sales revenue and total costs of production

Question 22

What is total revenue

Answer 22

All the money received by a firm for selling its total output

Question 23

What is a condition of supply

Answer 23

A determinant of supply other than the goods own price that fixes the position of the supply curve

Question 24

What is price elasticity of supply

Answer 24

Measures the extent to which the supply of a good changes in response to a change in the price of that good

Question 25

What is equilibrium

Answer 25

A state of rest or balance between opposing forces

Question 26

What is disequilibrium

Answer 26

A situation in which opposing forces are out of balance

Question 27

What is market equilibrium

Answer 27

A market is in equilibrium when planned demand equals planned supply, where the demand curve crosses the supply curve

Question 28

What is market disequilibrium

Answer 28

Exists at any price other than the equilibrium price

Question 29

What is excess supply

Answer 29

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Question 30

What is excess demand

Answer 30

When consumers wish to buy more than firms wish to sell with the price below the equilibrium price

Question 31

What is joint supply

Answer 31

When one good is produced another good is also produced from the same raw materials perhaps as a by product

Question 32

What is composite demand

Answer 32

Demand for a good which has more than one use , which means that an increase in demand for one use of the food reduces the supply of the food for an alternative use. It is related to the concept of competing supply

Question 33

What is derived demand

Answer 33

Demand for a good or factor of production, wanted not for its own sake, but as a consequence of the demand for something else

Question 34

When does a movement along a demand curve happen

Answer 34

Only when the goods price changes

Question 35

What conditions of demand shift the demand curve

Answer 35

``` Price of substitute goods Price of complementary goods Personal income Taste and preferences Population size ```

Question 36

Formula for PED

Answer 36

Ped = percentage change quantity demanded / percentage change in price

Question 37

Formula for yed

Answer 37

Yed = Percentage change in quantity demanded / | Percentage change in income

Question 38

Formula for XED

Answer 38

XED= percentage change in quantity of A demanded / | Percentage change in price of B

Question 39

What are the factors determining price elasticity of demand

Answer 39

``` Substitutability Percentage of income Necessities or luxuries The width of the market definition Time ```

Question 40

What is substitutability in terms of factors determining PED

Answer 40

When a substitute exists for a product consumers respond to a price rise by switching expenditure away from the good and buying the substitute where the prices has not risen

Question 41

What is percentage of income in determining price elasticity of demand

Answer 41

Demand curves for goods or services on which households spend a large proportion of their income tend to be more elastic than those small items that account for only a small fraction of income

Question 42

What are necessities or luxuries in terms of factors determining price elasticity of demand

Answer 42

Demand for necessities is price in elastic whereas the demand for luxuries is elastic When no obvious substitute exists for a luxury good may be inelastic

Question 43

What is the Time in determining price elasticity of demand

Answer 43

Demand is more elastic in the long run than in the short run because it takes time to respond to a price change

Question 44

What is income elasticity for demand an inferior good

Answer 44

Always negative

Question 45

What is income elasticity of demand for a normal good

Answer 45

Positive

Question 46

A good that is a necessity has an income elasticity lying between

Answer 46

0 and 1

Question 47

A good that is a luxury has a income elasticity of demand

Answer 47

1+

Question 48

What are the main conditions of supply

Answer 48

Costs of production- wage costs, raw material costs, energy costs and cost of borrowing Technical progress Taxes imposed on firms such as VAT Subsidies granted to firms

Question 49

What are the factors that determine price elasticity of supply

Answer 49

Length of the production period Availability of spare capacity Ease of accumulating sticks Ease of switching between alternative methods of production Number of firms in the market and the ease of entering the market Time - market period supply, short run supply, long run supply