Market Allocation and Demand Principles

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Questions and Answers

What primarily drives the supply in a market-based economy?

  • Producer incentives
  • Market competition
  • Government regulations
  • Consumer demand (correct)

According to the Law of Demand, what happens to quantity demanded when the price of a product increases?

  • Quantity demanded becomes unpredictable
  • Quantity demanded decreases (correct)
  • Quantity demanded increases
  • Quantity demanded stays the same

What is the relationship called that describes how different quantities of a product are demanded at various prices?

  • Supply Schedule
  • Price Elasticity
  • Demand Curve (correct)
  • Market Equilibrium

Which of the following contributes to the creation of demand in a market?

<p>Consumer independence (B)</p> Signup and view all the answers

How is total market demand for a good determined?

<p>By summing individual demand of all possible buyers (D)</p> Signup and view all the answers

Which of the following statements correctly describes consumer behavior in relation to demand?

<p>Consumers are likely to buy more as prices decrease (B)</p> Signup and view all the answers

What is the effect of a consumer purchasing a product on demand?

<p>It creates a need for re-stocking the product (B)</p> Signup and view all the answers

What causes the inverse relationship between price and quantity demanded?

<p>The diminishing marginal utility of products (C)</p> Signup and view all the answers

What is the primary mechanism through which resources are allocated in a capitalistic system?

<p>Market demand and supply (A)</p> Signup and view all the answers

What assumption does economic theory make about individual buyers and sellers in the market?

<p>They cannot impact the overall market situation. (D)</p> Signup and view all the answers

What two behaviors are shaped by the pricing system according to economic theory?

<p>Demand and supply (A)</p> Signup and view all the answers

What characterizes perfect competition in a market system?

<p>Many independent buyers and sellers (B)</p> Signup and view all the answers

According to Alfred Marshall, what is comparable to the interaction of supply and demand in the market?

<p>A pair of scissors (A)</p> Signup and view all the answers

How do government interventions typically affect market dynamics?

<p>They can create shortages and surpluses. (C)</p> Signup and view all the answers

What is the significance of price in a market according to economic theory?

<p>It acts as an allocation mechanism. (B)</p> Signup and view all the answers

What role do demand and supply play in establishing market equilibrium?

<p>They interact to move the market toward equilibrium. (C)</p> Signup and view all the answers

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Study Notes

Market Allocation

  • Market allocation is determined by the interaction of supply and demand.
  • Supply is driven by producers and demand is driven by consumers.
  • Perfect competition exists when there are many independent buyers and sellers.
  • The market is cleared when the price is reached that satisfies both producers and consumers.

Supply

  • Supply is created to meet consumer demand.
  • Producers seek opportunities to satisfy consumer needs.
  • Supply is a response to consumer spending.
  • Increased consumer demand for a product leads to increased production and price increases.

Demand

  • Consumer sovereignty determines what is produced in a market-based economy.
  • Demand is the relationship between the price of a product and the quantity demanded by consumers.
  • Demand is the series of prices and the related quantities that consumers are willing and able to purchase at a given time.

Law of Demand

  • There is an inverse relationship between price and quantity demanded.
  • The quantity demanded is the amount of a product consumers are willing and able to purchase at a specific price.
  • As price increases, the quantity demanded decreases.
  • As price decreases, the quantity demanded increases.
  • Total market demand is the sum of the individual demands from all potential buyers.

Inverse Demand Relationship

  • There are three reasons for the inverse relationship between price and quantity demanded:
    • Substitution Effect: Consumers will substitute a less expensive product for a more expensive one.
    • Income Effect: As prices increase, consumers have less purchasing power, leading to reduced demand.
    • Diminishing Marginal Utility: As consumption of a product increases, the satisfaction derived from each additional unit decreases, leading to lower demand.

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