Week_on_Eecon_Questions

Chapter One 1. What are the basic decision-making units in the economy' Supply, Demand and Market Equilibrium 2. What are the relationships between these basic units' How does a circular flow diagram illustrate these relationships' The relationship between supply and demand underlies the forces behind the allocation of resources. When opportunity costs are high suppliers can’t produce more; however, if the demand is higher the price will rise. 3. What do we mean by "quantity demanded'" What influences quantity demanded on the part of households' The amounts of product people are willing and able to buy at any given time. The price of the product influences the quantity demanded. 4. What is the demand schedule for a product' What are the main features of a demand curve' What is the law of demand and how is it illustrated by demand curves' The demand schedule for a product is a table showing the number of units of a single type of good (or service) that potential purchasers would offer to buy at each of a number of varying prices during some particular time period. Law of Demand is as prices fall quantity demanded will rise and as prices rise the quantity demanded decreased. 5. What can change the demand for a product' How does the demand curve react to changes in demand' What do we mean by normal goods' Inferior goods' Complementary goods' Substitute goods' The items that can change demand for a product include: preferences, population, prices of other goods and services, income and perceptions of future prices. Normal goods are quantity demanded for a particular good or service as a result a change in the given level of income. Inferior goods are the types of goods for which the demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as society’s economy improves. Complementary goods are material or goods whose use is interrelated with the use of and associated with a pair good such that a demand for one generates the demand for the other (tires for example). Substitute goods are products of services that partly satisfy the need of a consumer that another product or service fulfills. For a product to be a substitute of another good it must share a particular relationship with that good when that good’s prices increase, the demand for the substitute will increase. 6. What is the law of supply' What influences the quantity supplied of a good' What are the features of a supply curve' How do supply curves illustrate the law of supply' What factors can cause the supply of a product to change and how are these changes reflected in the supply curve' The law of supply is as prices rises the quantity supplied rises; as prices fall the quantity supplied falls. Items that influence the quantity supplied include: technology, expectation of producer, distributors, cost, prices of other products, subsidy, seasons and weather. 7. What is the equilibrium price for a product' What do we mean by a shortage' A surplus' Equilibrium is the market price at which the supply of an item equals the quantity demanded. Shortage is the disparity between the amount demanded for a product or service and the amount supplied by the market. Surplus is overage – too much supplied by the market. 8. How do changes in the supply or demand for a product affect its equilibrium price and quantity' If demand increases and supply remains unchanged then higher equilibrium price and quantity. If demand decreases and supply remains the same then lower equilibrium price and quantity. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity. If supply decreases and demand remains the same then higher price and lower quantity. Chapter Two 1. What are the two main functions that prices perform in market economies' How do they address the three main questions: what gets produced, how are they produced, and who gets the products' How do prices transmit information about changing consumer wants and resource availability' 2. How do prices ration goods' Why must goods be rationed' What are other means of rationing besides price' Are these other methods fairer than using price' 3. If the price of a good is kept below the market price, through the use of a government-imposed price control, how can the totals cost end up exceeding the supposedly higher market price'