Chapter 3

Question 1

Market Economy

Answer 1

Resources are allocated among households and firms with little or no government interference.

Question 2

Invisible Hand

Answer 2

A phrase coined by Adam Smith to refer to the unobservable market forces that guide resources to their highest valued uses.

Question 3

Competitive Markets

Answer 3

Exist when there are so many buyers and sellers that each has only a small impact on the market of an output.

Question 4

Market

Answer 4

A collection of buyers and sellers of a particular product or service.

Question 5

What are the two characteristics of a competitive market?

Answer 5

1) Similar goods. 2) Many participants.

Question 6

Imperfect Market

Answer 6

A market where buyers and sellers can influence the market price of a good or service.

Question 7

Market Power

Answer 7

Ability of a firm to influence the price of a good or service by exercising control over its demand, supply, or both.

Question 8

Monopoly

Answer 8

A single company supplies an entire market with a particular good or service. I.E Comcast.

Question 9

Quantity Demanded

Answer 9

The amount of a good or service that buyers are willing and able to purchase at the current price.

Question 10

Law of Demand

Answer 10

States that, all other things being equal, quantity demanded falls when price rises, and rises when prices fall.

Question 11

Demand Schedule

Answer 11

A table that shows the relationship between the price of a good and the quantity demanded.

Question 12

Demand Curve

Answer 12

A graph of the relationship between the prices in the demand schedule and the quantity demanded at those prices.

Question 13

Market Demand

Answer 13

The sum of all individual quantities demanded by each buyer in the market at each price.

Question 14

T/F A price change causes a movement along a given demand curve, but it cannot cause a shift of the demand curve.

Answer 14

True.

Question 15

How is a shift in demand shown on a demand schedule?

Answer 15

1) Lower demand is shown with a shift to the left. 2) Higher demand is shows with a shift to the right.

Question 16

What are some factors which can shift demand?

Answer 16

Buyer’s income, the price of related goods, changes in buyer’s tastes and preferences, price expectation, the number of buyers, and taxes.

Question 17

Purchasing Power

Answer 17

The value of your income expressed in terms of how much you can afford.

Question 18

Normal Good

Answer 18

Consumers buy more of a normal good as income rises.

Question 19

An inferior good

Answer 19

Purchased out of necessity rather than choice.

Question 20

Complementary Goods

Answer 20

Two goods that are used together. When the price of the complementary good rises, the demand for the other good goes down.

Question 21

Substitutes

Answer 21

Are two goods that are used in place of each other. When the price of a substitute rises, the quantity demanded for that good falls and the demand for the related good goes up.

Question 22

How do price expectations influence demand?

Answer 22

If you expect the price of a good to rise in the future, you are likely to buy more today. If you expect prices to fall soon, you may delay your purchases to try to get a lower price in the future.

Question 23

How do the number of buyers and demographics influence demand?

Answer 23

When population increases the wants and needs of the increased population shifts the demand curve to the right. Depending on demographics, the demand curve for certain goods may increase or decrease. IE Healthcare with boomers aging.

Question 24

Quantity Supplied

Answer 24

The amount of a good or service that produces are willing and able to sell at the current price.

Question 25

Law of Supply

Answer 25

States that, all other things being equal, the quantity supplied of a good rises when the price of the good rises, and falls when the price of a good falls.

Question 26

Supply Schedule

Answer 26

A table that shows the relationship between the price of a good and the quantity supplied.

Question 27

Supply Curve

Answer 27

A graph of the relationship between the prices in the supply schedule and the quantity supplied at those prices.

Question 28

Market Supply

Answer 28

Sum of the quantities supplied by each seller in the market at each price.

Question 29

What are some factors which can shift the supply curve?

Answer 29

1) Cost of inputs. 2) Changes in technology or the production process. 3) Taxes and Subsidies. 4) The number of firms in the industry. 5) Price Expectations

Question 30

Inputs

Answer 30

Resources used in the production process.

Question 31

Technology

Answer 31

Encompasses knowledge that producers use to make their products.

Question 32

Subsidy

Answer 32

A payment made by the government to encourage the consumption or production of a good or service.

Question 33

Equilibrium

Answer 33

Occurs at the point. where the demand curve and the supply curve intersect.

Question 34

Equilibrium Price

Answer 34

Price at which quantity supplied is equal to quantity demanded. Also called market clearing price.

Question 35

Equilibrium Quantity

Answer 35

The amount at which the quantity supplied is equal to the quantity demanded.

Question 36

Law of Supply and Demand

Answer 36

States that the market price of any good will adjust to bring the quantity supplied and quantity demanded into balance.

Question 37

Shortage

Answer 37

Occurs when the quantity supplied is less than the quantity demanded.

Question 38

Surplus

Answer 38

Occurs whenever the quantity supplied is greater than the quantity demanded.