Econ 101: Chapter 4

Question 1

Planned economy

Answer 1

centralized decisions are made about what is produced, how, by whom, and who gets what

e.g. Cuba, the USSR

Question 2

Market economy

Answer 2

each individual makes their own production and consumption decisions, buying and selling in markets

e.g. North America, Europe

Question 3

Market

Answer 3

a setting bringing together potential buyers and sellers.

Question 4

Different types of markets…

Answer 4

• ones have posted prices
• others are auctions
• some are financial market (traders buy and sell stock).

Question 5

Equilibrium

Answer 5

the point where there is no tendency for change.

Question 6

Markets are in equilibrium when…

Answer 6

quantity supplied equals quantity demanded.

Question 7

Equilibrium price

Answer 7

the price at which the market is at equilibrium.

Question 8

Equilibrium quantity

Answer 8

the quantity demanded and supplied in equilibrium.

Question 9

Market equilibrium is…

Answer 9

determined in equal measure by both supply and demand.

Question 10

Shortage

Answer 10

when the quantity demanded exceeds the quantity supplied.

Question 11

Surplus

Answer 11

when the quantity demanded is less than the quantity supplied.

Question 12

Shortages lead to a…

Answer 12

rise in price (shortages occur when the price is below equilibrium)

Question 13

Surpluses lead to a…

Answer 13

fall in price (surpluses occur when the price is above equilibrium).

Question 14

Disequilibrium

Answer 14

symptoms of a market out of equilibrium – raises the “effective price”

• also can see that same thing when there is a surplus – lowers the effective price.

Question 15

Disequilibrium type 1:

Answer 15

Queuing: waiting for a spot in line. Raises price as you are now spending time.

Question 16

Disequilibrium type 2:

Answer 16

Bundling of extras: buying something extra so you can get what you were after in the first place.

Question 17

Disequilibrium type 3:

Answer 17

Secondary market: buying from somewhere that is not the “official” market.

Question 18

Shifts in demand (causes)

Answer 18

PEPTIC.

Question 19

Increases in demand:

Answer 19

rightward curve shift – buy a larger quantity at each price.

New supply-demand equilibrium with increased price and quantity.

Question 20

Increases of demand (sellers):

Answer 20

sellers do not want to continue to supply at the old equilibrium price.

No price change would mean a shortage, so the price is driven up, providing incentive for the seller to supply more.

Question 21

Decrease in demand:

Answer 21

leftward curve shift – buy a smaller quantity at each price.

New supply-demand equilibrium at a decreased price and quantity.

Question 22

Decrease in demand (sellers)

Answer 22

Decrease in demand means that a surplus would result.

Prospect of a surplus drives price down, incentivizing sellers to supply less.

Question 23

Demand shifts causes

Answer 23

price and quantity to move in the same direction.

Question 24

Shifts in supply (cause)

Answer 24

I, POET

Question 25

Increase in supply:

Answer 25

rightward curve shift -- increases the quantity sellers plan to sell at each price. New supply-demand equilibrium at a increased quantity and decreased price.

Question 26

Increase in supply (buyers)

Answer 26

Sellers want to continue to sell at the old price, but buyers don't demand any more. This prospect of a surplus leads price to drop, incentivizing buyers to increase the quantity they demand.

Question 27

Decrease in supply:

Answer 27

leftward curve shift, decreases the quantity suppliers plan to sell at each price. New supply-demand equilibrium at a decreased quantity and increased price.

Question 28

Decrease in supply (buyers)

Answer 28

Decreased supply would mean a shortage. This prospect drives price up. This higher price incentivizes buyers to decrease the quantity they demand.

Question 29

Supply shifts cause

Answer 29

price and quantity to move in opposite directions.

Question 30

To predict market outcomes:

Answer 30

1. Is supply or demand curve shifting (or both). 2. Right shift or left shift? 3. How do prices and quantities compare at the new equilibrium?

Question 31

Anything that changes marginal benefits for buyers...

Answer 31

shifts the demand curve.

Question 32

Anything that changes marginal costs for sellers...

Answer 32

shifts the supply curve.

Question 33

Increase in marginal benefits...

Answer 33

= increase in demand

Question 34

Increase in marginal costs...

Answer 34

= decrease in supply

Question 35

When both supply and demand curves shift...

Answer 35

look at each shift separately and add up the effects.

Question 36

The effect of two curve shifts...

Answer 36

depend on which curve shifts the most.

Question 37

Morning-evening method

Answer 37

think about the demand as shifting in the morning. think about the supply as shifting in the evening.

Question 38

Market clearing

Answer 38

when supply equals demand