Questions and Answers
What is a market economy?
What is a market?
Buyers and sellers who trade a particular good or service.
What defines a competitive market?
A market in which fully informed, price-taking buyers and sellers easily trade a standardized good or service.
What is a standardized good?
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A competitive market must have these four things: standardized goods, full information, no ________, and price-taking participants.
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What are transaction costs?
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Price takers have the power to affect the market price.
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What is full information in a market context?
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What is a demand schedule?
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What is a demand curve?
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Nonprice determinants of demand include consumer preferences, the price of related goods, ________, expectations of future prices, and the number of buyers in the market.
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What are consumer preferences?
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What are substitutes and complements?
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What is the impact of incomes on demand?
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What role do expectations play in demand?
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What does the number of buyers in the market represent?
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Shifts in demand curves happen due to nonprice determinants.
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A change in price leads to a shift in the demand curve.
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What is quantity supplied?
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What is the law of supply?
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Higher prices lead to a decrease in the quantity produced by suppliers.
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What is a supply schedule?
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What is a supply curve?
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Nonprice determinants of supply include prices of related goods, ________, prices of inputs, expectations, and the number of sellers.
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How do prices of related goods affect supply?
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How does technology influence supply?
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What is the effect of the prices of inputs on supply?
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What role do expectations play in supply?
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How does the number of sellers affect supply?
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Study Notes
Market Economy
- Defined as an economy where private individuals make decisions rather than a centralized authority.
Market
- Comprises buyers and sellers trading a specific good or service.
Competitive Market
- Characterized by price-taking buyers and sellers trading standardized goods or services.
Standardized Good
- Goods that are interchangeable; all units possess identical features, e.g., gasoline from different stations performs the same function.
Requirements for Competitive Market
- Must include standardized goods, full information, no transaction costs, and price-taking participants.
Transaction Costs
- Costs incurred by buyers and sellers during the agreement and execution of sales; ideally minimized in a market exchange.
Price Takers
- Buyers and sellers with no influence on market prices, accepting the prevailing market price.
Full Information
- All market participants possess complete knowledge regarding prices and product features.
Demand Schedule
- A tabulated representation showing quantities consumers are willing to purchase at various prices.
Demand Curve
- A graphical depiction of the relationship between the price of a good and the quantity demanded by consumers.
Nonprice Determinants of Demand
- Influences such as consumer preferences, prices of related goods, income levels, expectations regarding future prices, and number of buyers.
Consumer Preferences
- Personal inclinations that affect a buyer’s willingness to purchase a good.
Price of Related Goods
- Includes substitutes (goods used in place of one another) and complements (goods consumed together).
Incomes
- Demand is categorized into normal goods (demand increases with income) and inferior goods (demand decreases with income).
Expectations
- Influences consumer behavior; anticipated future price changes can delay or hasten purchases.
Number of Buyers
- The demand curve illustrates demand based on the existing number of potential buyers in the market.
Key Point on Nonprice Determinants
- Shifts in the demand curve indicating an increase or decrease in demand occur when nonprice factors change.
Key Point on Price Changes
- Movement along the demand curve indicates a change in quantity demanded resulting from price changes.
Quantity Supplied
- Refers to the amount a producer is willing to offer for sale at a specific price in a designated time period.
Law of Supply
- States that, all else equal, quantity supplied increases as price increases.
Key Point on Price and Supply
- Higher prices incentivize producers to sell more of a specific good.
Supply Schedule
- A table that outlines how much of a good producers will supply at differing prices.
Supply Curve
- A graph illustrating quantities producers will supply at various price levels.
Nonprice Determinants of Supply
- Factors such as prices of related goods, technological advances, input costs, expectations, and the number of sellers.
Price of Related Goods (Supply)
- If the price of an alternative good rises, a producer may shift production, adjusting supply accordingly.
Technology
- Advances in technology lead to more efficient production, reducing costs and increasing supply at every price level.
Prices of Inputs
- Rising input costs lead to decreased supply, while a decrease in input costs results in increased supply.
Expectations (Supply)
- Suppliers adjust production based on expectations of future price movements.
Number of Sellers
- An increase in the number of producers raises the overall market supply, while a decrease lowers it.
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Test your knowledge of key concepts from Microeconomics Chapter 3 with these flashcards. Each card presents a term along with its definition to help reinforce your understanding of market structures and economic principles.