Competency 4: Cheat Sheet

Question 1

What is a market?

Answer 1

A group of buyers and sellers exchanging goods/services; can be organized (like a Foreign Exchange Market) or unorganized (like a yard sale)

Question 2

What is competition (competitive market)?

Answer 2

Many buyers & sellers; no one has market power or can affect the equilibrium market price.

Question 3

What is consumer demand?

Answer 3

The amount consumer are willing and able to purchase at a certain price.

Question 4

What is utility?

Answer 4

Measure of satisfaction/happiness from consuming a good/service.

Question 5

What is constrained utility maximization?

Answer 5

getting the most happiness within a limited budget.

Question 6

What are consumer preferences?

Answer 6

Consumers’ tastes/preferences make them happiness/satisfaction.

Question 7

What is a budget constraint?

Answer 7

A line that shows the combinations of goods a consumer can afford with a given income and prices.

Question 8

What is marginal utility?

Answer 8

The added satisfaction from consuming one more unit of a good.

Question 9

What is the Diminishing Marginal Utility?

Answer 9

As a consumer consumes more of a good, the marginal utility (satisfaction) from each additional unit decreases.

Explain why demand curved slope downward.

Question 10

What is the law of demand?

Answer 10

When the price of good rises, quantity demanded falls; when price falls, quantity demanded rises.

Question 11

What is the quantity demanded?

Answer 11

The amount of a good that buyers are willing and able to purchase (a point on the demand curve).

Question 12

What is a demand curve?

Answer 12

A graph that shows downward sloping (as price decreases, demand increases).

Question 13

What causes a movement along the demand curve?

Answer 13

Price change

Question 14

What causes a shift in the demand curve?

Answer 14

Changes in income (normal/inferior goods), prices of related goods (substitutes, Complements), tastes & preferences (advertising), expectations of price (future price), and number of buyers.

Question 15

Why is the demand curve downward sloping?

Answer 15

Due to diminishing marginal utility and the Law of Demand.

Question 16

What is market equilibrium?

Answer 16

The point where the quantity demanded equals the quantity supplied

Question 17

What is a surplus and shortage?

Answer 17

Surlpus= price is too high (excess supply).

Shortage = price is too low
(excess demand).

Question 18

What is the law of supply (sellers)?

Answer 18

As the price of a good increases, the quantity supplied decreases, and vice versa.

Question 19

What is quantity supplied?

Answer 19

The amount of a good that sellers are willing and able to sell (a point on the supply curve).

Question 20

What is a supply curve?

Answer 20

Upward sloping (as price increases quantity supplied increases)

Question 21

what causes a movement along the supply curve?

Answer 21

Price change

Question 22

What causes a shift in the supply curve?

Answer 22

Changes in input prices, technology, expectations, and number of sellers.

Question 23

What is elasticity?

Answer 23

Measures how demand responds to changes in price, income, or related goods’ prices.

Question 24

What is Elastic Goods (Price Elasticity)?

Answer 24

Elastic (>1): big response to price change (e.g., Teslas).

Elastic Goods has lots of substitutes, luxuries, & longer time horizon

Question 25

What does a positive income elasticity indicate?

Answer 25

Normal good (demand increases with income).

Question 26

Price Elasticity of Demand Formula

Answer 26

Changes in the price of the good % change in quantity demanded / % change in price.

Question 27

Income Elasticity of Demand formula

Answer 27

Changes in the income of consumers % change in quantity demanded / % change in income.

Question 28

Cross Price Elasticity of Demand formula

Answer 28

Changes in the price of related goods. % change in quantity demanded of good 1/ % change in price of good 2.

Question 29

What is a normal good (Change in Consumer Income?

Answer 29

A good for which demand increases as income increases (i.e., Steak, Jordans)

Question 30

What is an inferior good?

Answer 30

A good for which demand decreases as income increases (i.e., ramen noodles).

Question 31

What is a Substitute Good (Cross Price Elasticity)?

Answer 31

2 goods that can be substituted for each other (Coca Cola & Pepsi); if the price of one increases (Cola), demand for the other increases (Pepsi); which is Positive Cross Price Elasticity of Demand

Question 32

What is a Complement Good (Cross Price Elasticity)?

Answer 32

2 goods that always used together; i.e., coffee & creamer Example: the price for peanut butter increases, the demand for jelly decreases; which Negative Cross Price Elasticity of Demand

Question 33

Why is the supply curve upward-sloping?

Answer 33

As price increases, quantity supplied increases.

Question 34

If cereal prices fall, what happens to milk demand and price?

Answer 34

Milk demand increases (complements), price and quantity both rise.

Question 35

What is Inelastic Goods (Price Elasticity)?

Answer 35

Inelastic (<1): small response to price change (e.g., gasoline) Goods with no/fewer substitutes, necessities, & shorter time horizon

Question 36

What happens when there’s an increase in Supply and an increase Demand?

Answer 36

Price change is ambiguous (might go up or down), Quantity will increase. Supply Increase = Price Decrease, Quantity Increase Demand Increase = Price Decrease, Quantity Increase