Unit 1 - Supply and Demand

Question 1

Markets for goods and services

Answer 1

Firms sell, households buy

Question 2

Firms

Answer 2

Produce and sell, hire and use factors of production

Question 3

Households

Answer 3

buy and consume, own and sell factors of production

Question 4

Markets for factors of production

Answer 4

households sell, firms buy

Question 5

factors of production

Answer 5

labor, capital, land

Question 6

Perfectly competitive market characteristics

Answer 6

Enough buyers and sellers so no one can affect the prices - everyone is a price taker.

Everyone sells the same good

Question 7

Price taker

Answer 7

takes prices as given when deciding

Question 8

homogenous good

Answer 8

the same good
i.e. agricultural industry - apples

Question 9

imperfect competition

Answer 9

can exist as a monopoly, monopolistic competition, or monopsony

Question 10

Initial assumption

Answer 10

no market failure

Question 11

Quantity demanded

Answer 11

amount that a consumer is willing to buy at a particular price (i.e. 1 point on the line)

Question 12

Demand

Answer 12

relationship between price and quantity demanded (i.e. the whole line)

Question 13

The demand curve

Answer 13

doesn’t need to be straight, represents P & Q relationship, represents personal preference

Question 14

Why is slope of the demand curve negative?

Answer 14

Law of Demand: when price of a good rises, the quantity demanded falls

Question 15

Shifts of demand (what is held constant in the demand curve?)

Answer 15

Normal good: you demand more when income increases

inferior good: you demand less when income decreases and usually has a better substitute

Question 16

how will an increase in income affect demand for a normal good?

Answer 16

it’s not a variable on the graph, so it’s held constant when we draw the curve. when it changes, the curve shifts.

Question 17

an increase in income

Answer 17

causes D curve to shift out (higher quantity demanded at any price)

Question 18

complements in consumption

Answer 18

goods used together (i.e. coffee & sugar)

Question 19

substitutes in consumption

Answer 19

goods used instead of each other (i.e. coffee & tea)

Question 20

consumer preferences

Answer 20

can change b/c of trends, weather, knowledge, etc. and lead to shifts of D curve

Question 21

Shifts along the demand curve

Answer 21

Caused by changes in income, prices of other goods, tastes (held constant in D curve)

Question 22

Movements along the demand curve

Answer 22

caused by a change in the price of a good

Question 23

market demand curve

Answer 23

horizontally sum all the individual demand curves

Question 24

what is held constant in D curve?

Answer 24

1. prices of complements/substitutes in consumption
2. preferences
3. income (based on specific type of good)
4. expectations of future price increases (buy goods @ lower prices if they’ll increase later)

Question 25

Principle 1 of Microeconomics: People Face Trade-Offs

Answer 25

Efficiency vs. equality

Question 26

Efficiency

Answer 26

society gets max benefits from its scarce resources

Question 27

Equality

Answer 27

uniform distribution of resources among society's members

Question 28

Principle 2

Answer 28

The Cost of Something Is What You Give Up to Get It opportunity cost: what's given up to get an item

Question 29

Principle 3

Answer 29

Rational People Think at the Margin rational people and marginal change

Question 30

rational people

Answer 30

systematically and purposefully do the best to achieve their objectives, given available opportunities

Question 31

marginal change

Answer 31

a small incremental adjustment to an existing plan of action

Question 32

Principle 4

Answer 32

People Respond to incentives

Question 33

incentive

Answer 33

induces action (i.e. punishment or reward)

Question 34

Principle 5

Answer 34

Trade can make everyone better off trade allows specialization for each person & buying goods and services at a lower cost

Question 35

Principle 6

Answer 35

Markets are usually a good way to organize economic activity

Question 36

market economy

Answer 36

allocates resources through the decentralized decisions of many firms and households as they interact in markets for goods and services

Question 37

Adam Smith's invisible hand theory

Answer 37

households and firms interact in markets as if they are guided by this --> desirable market outcomes

Question 38

Smith's corollary

Answer 38

When a government prevents prices from adjusting naturally to supply and demand, it impedes the invisible hand’s ability to coordinate the decisions of the households and firms that make up an economy

Question 39

Principle 7

Answer 39

Gov't can sometimes improve market outcomes market economies need institutions to enforce property rights so individuals can own and control scarce resources

Question 40

property rights

Answer 40

the ability of an individual to own and exercise control over scarce resources

Question 41

Why might a government intervene in the market economy?

Answer 41

to promote efficiency or to promote equality

Question 42

market failure

Answer 42

market on its own fails to produce an efficient allocation of resources

Question 43

Quantity supplied

Answer 43

point on supply curve

Question 44

Supply/supply curve

Answer 44

entire line

Question 45

Why does the S curve slope up as the quantity supplied increase?

Answer 45

cost of making 1 more unit of the good increases

Question 46

What is held constant in supply curve?

Answer 46

input costs (or input prices) prices of complements and substitutes in production technology weather (for agriculture goods) taxes expectations of future price increases (applies if you can store good)

Question 47

input costs (or input prices)

Answer 47

good used in the production of another good

Question 48

complements in production

Answer 48

goods produced together (i.e. nonfat milk & cream)

Question 49

substitutes in production

Answer 49

goods that can be produced instead of each other (i.e. nonfat milk and 2% milk)

Question 50

technology

Answer 50

new machine allows for faster cappuccino production (less labor)

Question 51

weather (for agricultural goods)

Answer 51

like tech

Question 52

taxes

Answer 52

like input costs

Question 53

market supply curve

Answer 53

horizontal sum of individual S curves

Question 54

equilibrium

Answer 54

where supply and demand are in balance, Qs = Qd (stable outcome, no pressure for price to go up/down)

Question 55

shortage

Answer 55

Qd > Qs, price increases

Question 56

equilibrium

Answer 56

no more pressure on price

Question 57

How do price changes influence the market?

Answer 57

it goes to equilibrium

Question 58

surplus

Answer 58

lowers price, Qd < Qs, price fall