Goods and Factors Market Quiz

Goods Market and Factors Market

• Goods Markets: Used to exchange final goods and services. This includes consumer goods bought by households, capital goods bought by businesses, and goods bought by governments and foreign sectors. Raw materials, intermediate goods, factors of production are excluded.
• Gross Domestic Product (GDP) measures the total value of goods exchanged in product markets annually.
• Demand Side: Comprised of consumption expenditures, investment expenditures, government purchases, and net exports.
• Supply Side: Production by the business sector.
• Factors Markets (Resource Markets): Used to exchange the services of factors of production (labor, capital, land, entrepreneurship), not the factors themselves.
• National Income measures the value of services exchanged in factor markets annually.
• Assumptions: Beliefs or predictions used in economic theories, even without proof.
• Perfect Competition: A market situation where no firm or consumer significantly influences the market price.

Demand Analysis

• Shortage: Occurs when demand exceeds supply, causing price to rise as producers increase output and consumers decrease demand.
• Surplus: Occurs when supply exceeds demand, causing price to fall as producers decrease output and consumers increase demand.
• Price Mechanism: A system where price adjustments regulate supply and demand, clearing any market imbalances (shortage or surplus).
• Normal Goods: Goods whose demand increases with increased consumer income.
• Inferior Goods: Goods whose demand decreases with increased consumer income.
• Giffen Goods: A rare type of inferior good where a price increase leads to an increase in quantity demanded. This occurs when the income effect outweighs the substitution effect (when the good is a large proportion of a consumer's budget).
• Substitution Effect: The change in demand due to a good becoming relatively more or less expensive than substitute goods. Higher price leads to reduced demand and to consumption of the alternative, substitute product. Increased price makes the product more expensive relative to other goods, therefore quantity demanded falls.
• Income Effect: The change in demand due to a change in real consumer income when the prices change. Changing price causes higher or lower real income (purchase power) even when nominal income remains the same. Increased price decreases consumers' purchasing power and quantity demanded falls.
• Price Effect: Combined effect of income and substitution effects.
• Substitutes: Goods that are interchangeable (e.g., butter and margarine)
• Complements: Goods used together (e.g., left and right shoes, bread and butter)
• Cash Crops: Crops used as raw materials (e.g. cotton).

Demand

• Demand: The quantity of a good that buyers want to purchase at each price point.
• Law of Demand: Holding other factors constant, as price increases, quantity demanded decreases (negative relationship).
• Demand Schedule: A table showing different price-quantity demanded combinations.
• Demand Curve: A graph plotting price against quantity demanded.
• Demand Function: An equation describing how demand depends on multiple factors (price, tastes, income, prices of other goods, etc.).

Supply

• Supply: The quantity of a good that sellers are willing to sell at each price.
• Law of Supply: As price increases, quantity supplied increases.
• Supply Schedule: A table showing different price-quantity supplied combinations.
• Supply Curve: A graph plotting price against quantity supplied.
• Supply Function: An equation describing how supply depends on multiple factors (price, production costs, technology, prices of other goods, etc.).
• Determinants of Supply: Costs of production, Profitability of alternative products, Profitability of goods in joint supply, Nature and random shocks, Aims of producers, and Expectations of producers.
• Problems of Identification: Uncertainty about whether changes in equilibrium are caused by demand changes, supply changes, or both.

Equilibrium

• Equilibrium: A state where quantity demanded equals quantity supplied.
• Equilibrium Price: The price where supply and demand curves intersect.
• Equilibrium Quantity: The quantity at the point of intersection of the supply and demand curves.
• Algebraic Representation of Equilibrium: Mathematical equations describing the demand and supply functions, then solving for the equilibrium price and quantity using the condition Qd = Qs.

Test your understanding of goods and factors markets, including the concepts of GDP and National Income. This quiz covers the demand and supply sides as well as the assumptions behind economic theories. Perfect for students studying economics.