Questions and Answers
What is a market?
What defines a competitive market?
A market in which there are many buyers and many sellers so that each has a negligible impact on the market price.
What characterizes a perfectly competitive market?
All goods are exactly the same, and buyers and sellers are so numerous that no one can affect market price.
What does quantity demanded refer to?
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What is the law of demand?
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What is a demand schedule?
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What is a demand curve?
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What causes a demand curve to shift?
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What happens to quantity demanded when the number of buyers increases?
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Define normal good.
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Define inferior good.
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What are complements?
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What are substitutes?
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What does the term equilibrium refer to in economics?
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What happens in a surplus?
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What does a shortage indicate?
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Match the following terms with their descriptions:
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Study Notes
Market Concepts
- A market comprises buyers and sellers of a specific good or service.
- A competitive market features many buyers and sellers, each having minimal influence on market prices.
- In a perfectly competitive market, goods are identical, and participants are "price takers."
Demand Fundamentals
- Quantity demanded is the total amount consumers are willing to buy at a given price.
- Law of demand states that, ceteris paribus, higher prices lead to lower quantities demanded.
- A demand schedule is a table correlating price points with quantities demanded.
- A demand curve visually represents this relationship graphically.
Factors Influencing Demand
- Number of buyers: An increase in buyers shifts the demand curve right, increasing quantity demanded.
- Income impacts demand differently for normal and inferior goods; demand for normal goods rises with income, while it falls for inferior goods.
- Prices of related goods: Price changes affect demand inversely for complements (e.g., hot dogs and buns) and directly for substitutes (e.g., Coke and Pepsi).
- Tastes: Shifts in consumer preferences can lead to increased demand for specific goods.
- Expectations about future economic conditions can cause immediate changes in current demand for expensive goods.
Supply Fundamentals
- Quantity supplied refers to the amount sellers are willing to sell at a specific price.
- The Law of supply posits that higher prices lead to greater quantities supplied.
- A supply schedule shows the relationship between price and quantity supplied, while a supply curve graphically illustrates this relationship.
Factors Influencing Supply
- Input prices: Decreased production costs increase quantity supplied across price points.
- Technology: Advancements reduce costs and enhance supply profitability, increasing supply.
- Number of sellers: More sellers lead to higher overall supply.
- Expectations can affect supply decisions; anticipating future price increases may prompt sellers to reduce current supply.
Market Equilibrium
- Equilibrium is achieved when quantity supplied equals quantity demanded.
- The equilibrium price balances these two quantities, while the equilibrium quantity is sold at that price.
- A surplus occurs when supply surpasses demand, prompting sellers to lower prices to reach equilibrium.
- A shortage arises when demand exceeds supply, leading to price increases until balance is achieved.
Analyzing Changes in Equilibrium
- To analyze shifts in equilibrium:
- Identify which curve (supply or demand) shifts.
- Determine the direction of the shift (left or right).
- Use diagrams to visualize how these shifts affect equilibrium price and quantity.
Practical Market Scenarios
- Increase in gas prices leads to a rightward shift in the demand curve for hybrid cars, increasing both price and demand.
- Cost-reducing technology shifts the supply curve for hybrid cars right, resulting in lower prices and increased supply.
- A rare scenario where both gas prices rise and technology advances results in increased quantity of hybrids, with price outcomes dependent on shifts in demand versus supply.
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Description
Explore key concepts in Microeconomics with these flashcards focused on Chapter 4. From definitions of market to competitive markets, enhance your understanding of essential terms and principles. Perfect for quick study sessions and exam preparation.