Chapter 4 (DEMAND & SUPPY)

Question 1

A market

Answer 1

Interactions between buyers and sellers

Question 2

“Free Markets”

Answer 2

YES to gov. Property rights

Question 3

Shortage

Answer 3

• EXCESS DEMAND (Qd>Qs)
• creates pressures for prices to rise and provides incentives for businesses to increase Qs so that consumers then decrease Qd which ELIMINATES the shortage

Question 4

Surplus

Answer 4

• EXCESS SUPPLY (Qs>Qd)
• creates pressures for prices to decrease which provides incentives for business to decrease Qs so consumers then increase Qd which ELIMINATES the surplus

Question 5

Market clearing price/ Equilibrium Price

Answer 5

The price that equalizes quantity demanded and quantity supplied… blaming the forces of competition and cooperation so that there is no tendency for change

Question 6

Consumer Surplus

Answer 6

• (1/2) x Q x (P1-P0)
• or maximum price willing to pay minus actual price
• top triangle on graph

Question 7

Producer surplus

Answer 7

• (1/2) x Q x (P2-P0)
• or minimum price willing to pay minus actual price
• bottom triangle

Question 8

Deadweight Loss

Answer 8

• difference between maximum total surplus (original gain) and actual gain
• 1/2 x (P2-P1) x (Q1-Q2)
• measures inefficiency

Deadweight loss of producing too little: inner triangle on the left

Deadweight loss of producing too much: inner triangle on the right

Question 9

Total Surplus

Answer 9

• consumer surplus PLUS producer surplus

Question 10

Efficient market outcome

Answer 10

• consumers buy only products and services where marginal benefit is greater than marginal cost
• at the quantity of an efficient market outcome… marginal benefits EQUAL marginal costs