Unit 1 ASO2 - Decision-Making in Markets

Question 1

Market

Answer 1

An institution where buyers and sellers of a particular good and service negotiate an agreeable or equilibrium price.

Question 2

Markert Structure

Answer 2

The nature and level of competition that exists in a particular market.

Question 3

Four Types of Market Structures

Answer 3

-Pure or perfect competition
-Monopolistic competition
-Oligopoly
-Pure of perfect monopoly

Question 4

Market Power

Answer 4

The ability to set or control the price of the goods or service they sell.

Question 5

Why is strong competition important in markets?

Answer 5

-Higher efficiency in allocating resources to keep prices low as possible.
-Lower prices and greater purchasing power of incomes.
-Better quality of goods and services.
-Greater output of certain goods and services that consumers want most.
-International competitiveness of local firms.
-Lift material and non-material living standards.

Question 6

Law of Demand

Answer 6

States that, ceteris paribus the quantity of a particular good or service that buyers are willing and able to purchase varies inversely with the change in price.

Question 7

Ceteris Paribus

Answer 7

All other things being equal

Question 8

Quantity demanded of good/service contracts as the price rises because….

Answer 8

the good or service becomes less affordable, therefore, fewer consumers have the money or desire to obtain it.

Question 9

Quantity demanded of good/service expands as the price decreases because….

Answer 9

the good or service is now more affordable and tempting for consumers to purchase.

Question 10

Quantity Demanded

Answer 10

The total amount of a specific good or service that consumers are willing and able to purchase at a specific price during a given time.

Question 11

Non-price Factors of Demand

Answer 11

-disposable incomes
-the price of substitutes
-the price of complements
-Consumers tastes and preferences
-Interest rates
-population growth and demographic changes
-consumer confidence

Question 12

The Law of Supply

Answer 12

States that ceteris paribus, the quantity of a particular good or service that sellers are willing and able to produce and sell varies directly with the change in price.

Question 13

Quantity supplied of a good/service expands as the price rises because…

Answer 13

Quantity supplied of a good/service expands as the price rises because it is more profitable for businesses to sell their goods or service at a higher price.

Question 14

Quantity supplied of a good/service contracts as the price rises because…

Answer 14

it is less profitable for businesses to sell their goods and services at a lower price.

Question 15

Quantity Supplied

Answer 15

The total amount of a specific good or service that sellers are willing and able to produce and sell at a particular price during a given time.

Question 16

Non-price factors of supply

Answer 16

-costs of production
-technology
-productivity
-climatic conditions and other disruptions

Question 17

Why is strong competition important in a market?

Answer 17

-Higher efficiency in allocating recourses.
-Lower prices and greater purchasing power of incomes.
-Better quality of g&s.
-Greater output of certain goods and services that consumers want most.
-Life material and non-material living standards.

Question 18

Equilibrium

Answer 18

A state of balance in the market when the quantity demanded exactly equals the quantity supplied for a g or s for a given period of time.

Question 19

Equilibrium price

Answer 19

The one and only price where the amount of g or s that buyers want to purchase (quantity demanded) is exactly the equal to the amount producers want to sell (quantity supplied)

Question 20

Equilibrium quantity

Answer 20

The one and only quantity where the amount of a g or s that buyers want to purchase (quantity demanded) is exactly equal to the amount producers want to sell (quantity supplied).

Question 21

Fill in the blank:

Prices above equilibrium , result in a ….. of good or service (S>D) in a market, forcing prices ….. towards the equilibrium level.

Answer 21

Surplus, Down

Question 22

Fill in the blank:

Prices below equilibrium , result in a ….. of good or service (D>S) in a market, pushing prices ….. towards the equilibrium level.

Answer 22

Shortage, Up

Question 23

Assumptions of a perfectly competitive market include:

Answer 23

-There’s many buyers and sellers in the market
-Consumers sovereignty exists.
-Sellers are price takers.
-There is perfect knowledge of the market.
-There’s strong competition among sellers to keep prices low as possible.
-Sellers can enter and exit the market freely.
-The product(s) sold are identical or homogenous.

Question 24

Market mechanism

Answer 24

A system of decision making whereby the free forces of demand and supply operate to set relative prices of g and s at equilibrium in a market.

Question 25

Relative price

Answer 25

The price of one good or service compared to the price or another good or service e.g. wheat vs rice

Question 26

Relative profit

Answer 26

The profit that can be gained from producing one good or service compared to the profit that can be gained from producing another good or service.

Question 27

why do sellers care about relative prices?

Answer 27

change in relative prices affect relative profits, therefore sellers must carefully decide how to best allocate their resources to produce g & s that maximize not only profits but also wants from society.

Question 28

How does market mechanism allocate resources in a market in a market-based economy?

Answer 28

step 1. initial price negation. step 2. price fluctuations step 3. profit shuffle step 4. resource allocation

Question 29

initial price negation

Answer 29

buyers and sellers negotiate the price of a good/service in the market, ultimately reaching an equilibrium price. This establishes the relative price of a good/service against that of another.

Question 30

price fluctuations

Answer 30

over time, buyers and sellers change their decisions in response to non-price factors of supply and demand, which further influence demand and supply of a good/service. this causes the relative price of a good/service to move higher or lower against that of another. prices increase when market shortage develops (d>s) and decrease when there is a market surplus (s>d).

Question 31

profit shuffle

Answer 31

changing relative prices alter the relative profitability of producing different goods/services, making some more or less attractive. they signal sellers about which areas of production are more profitable compared to others.

Question 32

resource allocation

Answer 32

the higher relative price of goods/services incentives sellers to increase production to meet rising demand, whereas a lower relative repels resources and decreases production. this process helps ensure that scarce resources are directed towards producing goods and services most desired to consumers as it is naturally more profitable.

Question 33

market mechanism and answering three basic economic questions: what and how much to produce?

Answer 33

only some wants can be satisfied, so sellers naturally opt to satisfy those that are relatively more profitable than others. market failure created: socially undesirable yet portable goods and services, like alcohol, illegal drugs, etc, can be overproduced whereas unprofitable or socially desirable goods and services like affordable healthcare, housing, can be under-produced. The government can intervene using either indirect taxes to discourage or subsides to encourage production.

Question 34

market mechanism and answering three basic economic questions: how to produce?

Answer 34

to maximize profits and keep prices low, sellers in a competitive market are encouraged to minimize their production costs while maximizing productivity and efficiency. market failure created: to reduce costs, sellers may risk the health and safety of their workers or damage the natural environment, like following dangerous working conditions or releasing pollution into the air or water bodies, since they are relatively cheaper than other options. The government can use laws and regulations like the occupational health and safety act to regulate production methods.

Question 35

market mechanism and answering three basic economic questions: for whom to produce?

Answer 35

individuals who earn higher incomes by selling their high in-demand skills can purchase more goods/services than those with fewer skills who earn lower incomes. market failure created: there is an increased likelihood of extreme incomes inequality and poverty in society, which can lower the living standards. the government can help to narrow the income gap by redistributing income through the progressive taxation system, the payment of welfare benefits to the needy, and the provision of free or low-cost public services like education and hospitals.