Economics Ch. 6 Market Forces

What are 3 types of choices people have to make?

1. Choices involving uncertainty and risk 2. Choices involving strategic interactions with others 3. Choices involving present vs future outcomes

What factors shift the supply curve rightward?

1. Reduction in costs of resources 2. Decline in costs of substitute 3. Technology advancement for the product 4. Change in expectations that expand production 5. Increase in number of sellers

What Questions do markets answer?

1. What to produce? 2. How to produce it? 3. For whom to produce it?

What shifts the demand curve rightward?

1. an increase in income of consumers 2. increase in price of substitute 3. decrease in price of a compliment 4. increase in number of consumers 5. change in expectations encourages consumers to purchase 6. change in consumer tastes in favor of the product

A situation achieved when a firm produces output most valued by consumers.

A. Allocative Efficiency

Where would the price floor be in relation to the equilibrium?

Above the equilibrium

How do price and quantity demanded affect each other along the demand curve?

As price increases, quantity demanded decreases.

How do price and quantity supplied affect each other along the supply curve?

As price increases, quantity supplied increases.

An approach that borrows insights from psychology to help explain economic decisions.

B. Behavioral economics

Given an upward-sloping supply curve, a rightward shift of the demand curve...

B. increases both equilibrium price and quantity

Where is the price ceiling set in relation to the equilibrium?

Below the equilibrium

The idea that there are limits on the amount of information that people can comprehend and act on.

C. Bounded Rationality

Which of the following demonstrates the problem of bounded rationality?

D. Ted bought the first computer a salesperson recommended him.

A market will stay in equilibrium until...

D. both a & b

What happens when firms are not efficient?

Either have to shape up, or leave market.

What is your self-interest in conflict with?

Ethical sense of fairness

True/False A market is always in a state of equilibrium.

False

True/False A price below a product's equilibrium price will result in a surplus of the product.

False

True/False A price ceiling has an impact only if ceiling price is set above its equilibrium level.

False

True/False Limited will power is more of a problem when decisions are made for the short run than for the long run.

False

True/False: Market Exchange is a voluntary activity where only one side of the market expects to benefit.

False

True/False As long as the supply curve slopes downward, a leftward shift of the demand curve reduces both price and quantity.

False, it has to slope upward.

True/False When the marginal benefit that consumers derive from a good equals the marginal cost of producing that good, that market is said to be productive efficient.

False, it's allocative efficient

What does a surplus do to price?

Forces price down.

Matching: The quantity of a product demanded is not equal to the quantity supplied.

G. Disequilibrium

What does the invisible hand of competition promote?

General Welfare

What causes the price to reach equilibrium in competitive markets?

Independent decisions of buyers and sellers

What are people prone to when facing complex financial decisions?

Inertia

Quantity demanded equals quantity supplied and the market clears

K. Market equilibrium

A maximum legal price above which a product cannot be sold.

M. Price ceiling

A minimum legal price below which a product cannot be sold

N. Price Floor

What causes markets to have to adjust?

New products and changes in supply and demand.

A situation achieved when a firm produces output at the lowest possible cost per unit.

O. Productive efficiency

Disequilibrium

Occurs when quantity demanded and quantity supplied are not in balance

The amount by which the quantity demanded exceeds the quantity supplied at a particular price.

P. Shortage

What happens when the demand curve shifts leftward?

Price and quantity decrease

What happens when the demand curve shifts rightward?

Price and quantity increase

How do price and quantity supplied get affected as the supply curve shifts rightward?

Price decreases, quantity supplied increases.

How does the price floor affect markets and economic welfare?

Price floors distort markets and reduce economic welfare.

How do price and quantity supplied get affected as the supply curve shifts leftward?

Price increases, quantity supplied decreases.

How does suppliers desire to eliminate surplus affect price?

Puts a downward pressure on the price.

The amount of a product that remains unsold at a given price.

Q. Surplus

The cost of time and information needed to carry out market exchange.

R. Transaction Costs

How do markets affect transaction costs?

Reduce them

shortage

The amount by which the quantity demanded exceeds the quantity supplied at a particular price.

Surplus

The amount by which the quantity exceeds the quantity demanded at a specific price.

What does the demand curve reflect?

The marginal benefit that consumers attach to each unit of goods

A consumer values what at least as much as the product sold?

The money received.

A buyer values what as much as the money paid for it?

The product purchased at least as much as paid for it.

True/False A shift of the supply curve results from a change in quantity demanded at all prices.

True

True/False As long as the demand curve slopes downward, a rightward shift of the supply curve reduces price but increases quantity.

True

True/False As long as the supply curve slopes upward, a rightward shift of the demand curve increases both price and quantity.

True

True/False Competitive markets maximize the amount of consumer surplus in the economy.

True

True/False If a firm's costs of production fall while the demand for their product grows, you can be sure the equilibrium price for the product will fall.

True

True/False the marginal benefit that consumers attach to the final unit purchased just equals the marginal cost of the resources employed to produce the unit.

True

True/False: A surplus puts downward pressure on price while shortage puts upward pressure.

True

When there is a voluntary exchange, it is reasonable to believe that...

a. both buyer and seller gained.

market price

amount of money people are willing and able to pay for the final unit.

Behavioral economics

an approach that borrows insights from psychology to help explain economic choices

Each of the following will cause the demand for butter to increase except....

c. an increase in the number of people who are unemployed

_______ ensure that firms achieve productive efficiency.

competition

Decrease in Demand

consumers are willing and able to buy less of the product at each price

increase in demand

consumers are willing and able to buy more of the product at each price

Each of the following will cause supply to increase except when....

d. a number of experienced workers retire and are replaced by new workers.

nueroeconomics

examines how economic decision making affects ares of the brain

What do consumers do as the price falls?

increase their quantity demanded

The higher the transaction cost, the what?

less likely it is that an exchange takes place.

Willpower

limited self-discipline in following through with decisions that are in one's self-interest, especially long term interests.

In Equilibrium what does marginal benefit equal?

marginal cost

Price ceiling

maximum legal price

Price Floor

minimum legal price

___________ is a subfield of behavioral economics that examines how economic decision making affects areas of the brain.

neuroeconomics

What does supply curve reflect?

opportunity cost of producing the good

What does marginal cost measure?

opportunity cost of resources employed by the firm to produce that final unit sold.

hat happens when something (like Medicaid) is provide for free?

people consume it until their marginal benefit is zero

Decrease in supply

producers are willing and able to supply LESS of the product at each price

Increase in supply

producers are willing and able to supply MORE of the product at each price

What does productive efficient refer to?

producing output at the lowest possible cost.

What do producers do as price falls?

reduce their quantity supplied

What does a price ceiling create?

shortage

What does a price floor above the equilibrium create?

surplus

What does competition ensure?

that firms produce at the lowest possible cost per unit.

Transaction costs

the costs of time and information required to carry out market exchange

Consumer surplus

the difference between the highest price a consumer is willing to pay for a good or service and the actual price the consumer pays

What does equilibrium price equal?

the marginal cost of supplying the final unit sold.

Bounded Rationality

there are limits to the amount of information people can comprehend and act on

What happens when markets have to adjust?

there are temporary shortages.

Why does federal government regulate some prices of agricultural products?

to ensure farmers a higher and more stable income

What is the "invisible hand" by Adam Smith?

voluntary choices of buyers and sellers responding only to their individual incentives.

When does Productive efficiency occur?

when a firm produces at the lowest possible cost per unit.

When does allocative efficiency occur?

when firms produce the output that is most valued by consumers.

market equilibrium

when the quantity consumers are willing and able to buy equals the quantity producers are willing and able to sell