Economics Competitive Markets Quiz

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Questions and Answers

What happens to the quantity demanded when the price increases, according to the law of demand?

It fluctuates randomly.

It decreases. (correct)

It remains unchanged.

It increases.

Which of the following scenarios would lead to a rightward shift in the demand curve?

A rise in the prices of substitutes.

An increase in the price of a good's complement.

An increase in consumer income for normal goods. (correct)

A decrease in the number of buyers in the market.

Which statement best defines equilibrium price?

The price at which demand exceeds supply.

The price at which producers have surplus inventory.

The price at which quantity supplied equals quantity demanded. (correct)

The highest price sellers can set regardless of demand.

What is the effect of a decrease in the number of sellers in a market?

It decreases supply. (A) Signup and view all the answers

What is an absolute advantage?

The capacity to produce more efficiently than others using the same resources. (D) Signup and view all the answers

Which factor would cause a movement along the supply curve?

A change in the price of the good itself. (B) Signup and view all the answers

How does an increase in the price of a substitute affect the demand for a good?

The demand for the good increases. (B) Signup and view all the answers

What does the concept of diminishing utility imply?

The satisfaction received from additional units consumed decreases. (D) Signup and view all the answers

What type of price discrimination occurs when a producer knows exactly each consumer's willingness to pay?

Perfect price discrimination (B) Signup and view all the answers

Which of the following goods is classified as non-rival and non-excludable?

A public fireworks display (D) Signup and view all the answers

What issue arises when there are no restrictions on the use of a rival public good?

Tragedy of the commons (C) Signup and view all the answers

How does imperfect price discrimination generally impact total surplus in a market?

It can raise, lower, or leave unchanged total surplus (C) Signup and view all the answers

Which of the following best describes common resources?

Rival but non-excludable (D) Signup and view all the answers

What is a likely outcome when negative externalities are present in a market?

More quantity is produced than socially desirable (C) Signup and view all the answers

What solution is typically recommended for internalizing negative externalities?

Imposing taxes equivalent to the external cost (A) Signup and view all the answers

Which of the following is an example of a private good?

A movie ticket (B) Signup and view all the answers

What is the definition of opportunity costs?

The value of the best alternative given up to take an action (D) Signup and view all the answers

Which situation describes diminishing marginal product?

Each additional worker contributes less output than the previous worker (A) Signup and view all the answers

What characterizes economies of scale?

Average total costs decrease as production increases (B) Signup and view all the answers

How is economic profit calculated?

Total revenue minus all opportunity costs (C) Signup and view all the answers

What is the definition of allocative efficiency?

Allocating resources such that the value of output equals the value buyers place on it (B) Signup and view all the answers

What does a price ceiling represent?

A government-imposed limit on how high a price can be charged (D) Signup and view all the answers

What differentiates direct taxes from indirect taxes?

Direct taxes are on income and wealth, while indirect taxes are levied on sales (C) Signup and view all the answers

Which statement best describes X-inefficiency?

Firms fail to reach maximum efficiency due to complacency (A) Signup and view all the answers

What is a sunk cost?

A cost already incurred that cannot be recovered (A) Signup and view all the answers

What is the relationship between average revenue and price?

Average revenue equals total revenue divided by quantity sold (A) Signup and view all the answers

How does a flat tax on diesel impact the supply of diesel in the market?

It results in a leftward shift of the supply curve. (B) Signup and view all the answers

What characterizes a monopoly compared to competitive firms?

A monopoly always sells at higher prices without any close substitutes. (A) Signup and view all the answers

Which scenario best describes the concept of price discrimination?

A firm varies prices based on customer age or geographical location. (B) Signup and view all the answers

What is a consequence of imposing a tax on a good in the market?

It typically raises the equilibrium price. (B) Signup and view all the answers

Why are goods with inelastic supply and demand preferred for tax revenue collection?

Taxing such goods raises a consistent revenue without affecting consumption significantly. (B) Signup and view all the answers

Which statement accurately describes market power?

It indicates a firm's ability to influence prices in the market. (B) Signup and view all the answers

What happens to marginal revenue for monopolies when they sell an additional unit?

It must decrease because the price of all units must be lowered. (D) Signup and view all the answers

In terms of efficiency and equity in a market, what is the primary goal of market equilibrium?

To balance supply and demand, maximizing total surplus. (A) Signup and view all the answers

Natural monopolies are characterized by which of the following?

Higher average costs when multiple firms enter the market. (C) Signup and view all the answers

What is the role of barriers to entry in maintaining a monopoly?

They restrict entry to the market, protecting incumbents. (D) Signup and view all the answers

What is the opportunity cost of attending university?

The money that could have been earned during that time (C) Signup and view all the answers

How does an increase in input prices affect supply?

Shifts the supply curve to the left (A) Signup and view all the answers

What defines comparative advantage?

The ability to produce a good at a lower opportunity cost (C) Signup and view all the answers

What happens to equilibrium price and quantity when both supply and demand increase equally?

Equilibrium price remains the same, equilibrium quantity increases (D) Signup and view all the answers

What results from a price ceiling being imposed?

Shortages in the market (A) Signup and view all the answers

What does price elasticity of demand measure?

The change in quantity demanded due to price changes (B) Signup and view all the answers

What happens when marginal utility equals marginal cost?

The optimal level of production is achieved (B) Signup and view all the answers

What occurs if marginal product is increasing?

Marginal cost is decreasing (C) Signup and view all the answers

What is a characteristic of diseconomies of scale?

Coordination problems within the organization (B) Signup and view all the answers

What does the concept of ceteris paribus imply?

Only one factor is considered at a time (C) Signup and view all the answers

How is explicit cost different from implicit cost?

Explicit costs are tangible; implicit costs are intangible (D) Signup and view all the answers

What does an increase in average fixed costs indicate?

Production levels have decreased (A) Signup and view all the answers

What is the relationship between total revenue and total cost at break-even?

Total revenue equals total cost (B) Signup and view all the answers

Study Notes

Competitive Markets

A competitive market has many buyers and sellers, with no single participant influencing prices.
Quantity demanded is the amount of a good buyers are willing and able to purchase at a given price.
The law of demand states that, holding other factors constant, quantity demanded decreases as price rises, and increases as price falls.
A demand schedule shows the inverse relationship between price and quantity demanded in tabular form.
A demand curve graphically represents the inverse relationship between price and quantity demanded.

Competitive Advantage

Absolute advantage exists when a company produces a good or service more efficiently than competitors, using the same resources.
Competitive advantage arises when a company produces goods at the lowest opportunity cost relative to others.

Movements vs. Shifts in Demand

A movement along a demand curve is caused by a change in price.
A shift in a demand curve is caused by a change in non-price factors such as:
- Income (normal goods increase in demand with income; inferior goods decrease in demand with income)
- Preferences
- Expectations about future price changes
- Advertising
- Related goods (substitutes and complements)

The Law of Supply

The higher the price, the more producers are willing to supply a good; vice versa.

Factors Influencing Supply

Supply can change due to numerous factors, including:
- Natural and social factors (weather, disasters)
- Technology (productivity and costs)
- Number of sellers

Equilibrium

Equilibrium price is the price where quantity supplied equals quantity demanded.
Equilibrium quantity is the amount bought and sold at the equilibrium price.

Utility

Diminishing marginal utility means the additional satisfaction from consuming one more unit of a good decreases as consumption increases.
To maximize utility, consumers should consume goods up to the point where the marginal benefit equals the marginal cost.

Normative vs. Positive Statements

Normative statements are based on opinions (should be).
Positive statements are based on facts (are).

Opportunity Cost

Opportunity cost is the value of the next best alternative forgone.

Comparative Advantage vs. Absolute Advantage

It's possible to have comparative advantage in one area and absolute advantage in another.
Comparative advantage is determined by the lowest opportunity cost, not necessarily absolute efficiency.

Elasticity

Elasticity measures the responsiveness of one variable to a change in another.
- Price elasticity of demand measures responsiveness of quantity demanded to a price change.
 - Ed < 1: Inelastic
 - Ed = 1: Unit elastic
Price elasticity of supply measures responsiveness of quantity supplied to a price change.

Price Controls

Price ceilings (maximum prices) and price floors (minimum prices) can cause shortages or surpluses in markets.

Costs in the Short Run and Long Run

Short-run costs include fixed costs that can't be adjusted quickly.
Long-run costs include all variable costs, as firms can adjust all inputs.
Economies of scale occur when increasing output leads to decreasing average total costs.
Diseconomies of scale occur when increasing output leads to increasing average total costs.

Cost Concepts

Average total cost (ATC): Total cost divided by quantity of output.
Marginal cost (MC): The cost of producing one additional unit.
Marginal product: The increase in output resulting from adding one more unit of a variable input.
Total revenue: Price multiplied by quantity.
Profit: Total revenue minus total cost (explicit and implicit).

Profit Maximization

Profit maximization occurs where marginal cost equals marginal revenue.

Law of Diminishing Returns

The law of diminishing returns states that as more of a variable input is added to fixed inputs the marginal product of the variable input eventually decreases.

Principal-Agent Problem

This problem arises when agents act in their own self-interest, which might not align with the interests of the principal.

Market Efficiency

Allocative efficiency is achieved when resources are allocated so that the value of the output to consumers equals the value of the inputs to producers.

Consumer and Producer Surplus

Consumer surplus is the difference between the willingness to pay and the price paid.
Producer surplus is the difference between the price received and the minimum acceptable price.
Total surplus is the sum of consumer and producer surplus.

Taxation

Specific taxes and Ad-Valorem tax impact supply and price, quantity.

Market Structures

Monopoly is a firm that is the sole seller of a product without close substitutes.
Barriers to entry can lead to monopolies.
Natural monopolies occur when one firm can supply the entire market at a lower cost than two or more firms.

Price Discrimination

Price discrimination occurs when a firm charges different prices to different customers for the same product.
Price discrimination can increase profits but may have negative effects on consumer welfare. Perfect price discrimination is when a firm charges each consumer their maximum willingness to pay.

Market Failures

Externalities (positive or negative) can cause markets to under or overproduce a good or service.
Public goods are goods that are non-rivalrous and non-excludable. The free-rider problem makes it difficult for markets to provide these efficiently.
Common resources are rivalrous but non-excludable. The tragedy of the commons occurs when individuals overuse common resources.

Efficiency Vs Equity

Efficiency refers to the optimal allocation of resources. Equity refers to fairness in the distribution of resources and benefits.

Market vs. Non-Market Factors

Certain economic and social factors can impact a market's function, besides the market itself dynamics.

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Description

Test your understanding of competitive markets and demand dynamics. This quiz covers crucial concepts such as demand schedules, demand curves, and the distinctions between movements and shifts in demand. Assess your knowledge of competitive advantage and its implications in economics.