Econ- How a Market System Functions

Money

An asset that is socially and legally accepted as a medium of exchange, three functions of money: medium of exchange, store of value, unit of measure

Medium of exchange

An asset used as payment when purchasing goods/services

Store of value

An asset that serves as a means of holding weatlh

Unit of measure

A basic measure of economic activity

Demand

The relationship between the price of a good and the quantity that consumers are willing and able to purchase, all other factors fixed

Supply

The relationship between the price of a good and the quantity that firms are willing and able to sell, all other factors fixed

Law of Demand

All other factors fixed, a greater quantity of a good will be demanded at lower prices (demand curves are downward sloping

Law of Supply

All other factors fixed, a greater quantity of a good will be supplied at higher prices (supply curves are upward sloping

"Horizontal Interpretation" of Demand Curve

Start by focusing on a particular price, and then go over to the demand curve horizontally to determine the corresponding quantity demanded at this particular price

"Vertical Interpretation" of Demand Curve

Start by focusing on a particular quantity demanded, and then go up to the demand curve vertically to determine the corresponding price at which this particular quantity would be demanded

"Horizontal Interpretation" of Supply Curve

Start by focusing on a particular price, and then go over to the supply curve horizontally to determine the corresponding quantity supplied at this particular price

"Vertical Interpretation" of Supply Curve

Start by focusing on a particular quantity supplied, and then go up to the supply curve vertically to determine the corresponding price at which the particular quantity would be supplied

Buyer's reservation price

The maximum amount of money that he is willing to give up to acquire the item

Seller's reservation price

The minimum amount of money that she is willing to accept in exchange for this item

Equilibrium

A "stable state" for a system which will persist as long as outside factors do not change, at the market equilibrium no individual buyer and no individual seller can alter his or her own behavior in such a way as to increase his or her own surplus

Excess supply

A situation in which quantity supplied is greater than quantity demanded (resulting in "downward pressure" on price)

Excess demand

A situation in which quantity demanded is greater than quantity supplied (resulting in "upward pressure" on price)

The market equilibrium in the model of Supply and Demand is:

Stable- if we are there we will stay there, unless outside forces change
Unique- there is one and only one equilibrium, a property which follows from the "Law of Demand" and "Law of Supply"
Self enforcing- at higher prices there is a downward pressure on price; at lower prices there is upward pressure on price- therefore if we are at some other price, we will be pushed toward the equilibrium price

Increase in Demand

A change in demand consistent with consumers being more willing to purchase the good, in that at every price the new quantity demanded is greater than the previous quantity demanded (visually, such a change is illustrated as a "rightward shift" of the demand curve)

Decrease in Demand

A change in demand consistent with consumers being less willing to purchase the good, in that at every price the new quantity demanded is less than the previous quantity demanded (visually, such a change is illustrated as a "leftward shift" of the demand curve)

Increase in supply

A change in supply consistent with firms being more willing to sell the good, in that every price the new quantity supplied is greater than the previous quantity supplied (visually, such a change is illustrated as a "rightward shift" of the supply curve)

Decrease in Supply

A change in supply consistent with firms being less willing to sell the good, in that at every price the new quantity supplied is less than the previous quantity supplied (visually, such a change is illustrated as a "leftward shift" of the supply cirve

Determinants of Supply

(Factores that change supply)- changes in the following will result in an increase in supply: (1) a decrease in the cost of any factors of production used to produce the good; (2) an improvement in technology that reduces production costs; (3) a favorable realization of "natural events"; (4) an increase in "market size"; (5) an expectation of lower future prices. Changing any of these factors in "the opposite direction" would result in a decrease in supply

Role of profits in a free market economy

Profits serve as a vital "signaling device" in free market economics, directing resources to their most valuable use

Entrepreneur

Someone who organizes and manages business, typically with considerable initiative and exposure to risk

Role of the Entrepreneur

Profits can only serve as effective signals insofar as someone is able to recognize, appreciate, and respond according to different levels of profit

Spontaneous Order

The natural and undirected emergence of order out of seeming chaos

Three surprising insights form "I, Pencil" video

No one person possesses the know-how to make a pencil, most who helped make the pencil did not intend to or necessarily care to specifically make a pencil, the entire process takes place (and valued goods, such as pencils, are produced) without any planner overseeing or dictating the process

Which of the following could NOT result in a "Change in Supply" for "MP3 Players"

A. An improvement in the technology used to produce MP3 Players
B. A decrease in the price of plastic (an input used in the production of MP3 players)
C. An increase in the market price of MP3 players
D. A decrease in the number of sellers of MP3 players

Which markets are represented in the Basic Circular Flow Diagram?

A. Markets for "Imports and Exports" and markets for "Factors of Production"
B. Market for "Goods and Services" and markets for "Factors of Production"
C. Markets for Financial Assets" and markets for "Imports and Exports"
D. Markets for "Goods and Services" and markets for "Financial Assets"

One of the principle functions of money is that is serves as a "unit of account." This role could be described by recognizing that money

A. Is an asset used as payment when purchasing goods and services
B. Is an asset that can be used as a means to hold wealth
C. Is used as a basic unit of measuring economic activity
D. None of the above answers are correct

During the last several decades, health officials in the United States have argued that eating too much beef might be harmful to humans. As a result, there has been a significant decrease in the amount of beef produced. Which of the following best explains this decrease in production?

A. Government officials ordered beef producers to produce relatively less beef (out of concern for consumer health)
B. Animal Right Activists have made it difficult for both buyers and sellers of beef to freely trade the good in free markets
C. Beef producers (whose primary concern is the health of their customers) decided to produce relatively less bee
D. Individual consumers (concerned about their own health) decreased their demand for beed (resulting in decrease in both the equilibrium price and equilibrium quantity of beef)

Supply

A. Refers to the entire relationship between the price of a good and the number of unites that firms are willing and able to sell, all other factors are fixed
B. Refers to the amount of a good that firms are willing to sell at the equilibrium price
C. Provides a summary of the behavior of buyers in a market
D. More than one (perhaps all) of the above answers are correct

The Basic Circular Flow Diagram

A. Summarizes the different combinations of output that a society could produce, given their currently available productive resources
B. Illustrates how Supply and Demand interact to determine the unique equilibrium price and equilibrium quantity in market
C. Illustrates the interaction between households and firms in a simplified free market economy
D. None of the above answers are correct

Privately owned enterprises in a free market economy have a primary goal of

A. Exploiting workers
B. Earning as large of a profit as possible
C. Tricking consumers into thinking that they are "environmentally conscious"
D. More than one (perhaps all) of the above answers are correct

An increase in income will result in a decrease in demand for

A. A normal good
B. An inferior good
C. A substitute good
D. A complementary good

Between August 2014 and August 2016 there was an increase in both price and quantity traded of corn. This change in market equilibrium outcome would result from

A. An increase in Demand
B. A decrease in Demand
C. An increase in Supply
D. A decrease in Supply

?????? refers to someone who organizes, meanies, and assumes the risks of a firm, taking a new idea of a new product and turning it into a successful business

A. An Invisible Hand
B. An Entrepreneur
C. A Central Planner
D. A Social Surplus

Which of the following demonstrates the "Law of Demand"

A. After Clarissa got a raise at work, she bought more donuts at $6 per dozen than she did before her raise
B. After the price of flour increased by 12%, Sabrina chose to sell fewer donuts
C. Melissa chooses to sell more donuts at $7.25 per dozen that she chooses to sell at $6.75 per dozen
D. Joan chooses to buy fewer donuts at $9.00 per dozen than she chooses to buy at $7.75 per dozen

Consider the market for oranges. If there is "excess demand" at a price of $2.35, then the equilibrium price must be:

A. Above $2.35
B. Exactly equal to $2.35
C. Below $2.35
D. None of the above answers are correct (since more information is needed to answer the question)

In a "free market economy" profits

A. Refer to the "gain" that a buyer gets from purchasing a good/service
B. Serve as a "signaling device," directing resources to their most valued uses
C. Are only earned by firms who exploit workers
D. More than one (perhaps all) of the above answers are correct

Last weekend Brenda won $1,500 at a casino in Biloxi, Mississippi. She decided to use the money to purchase a new TV from Walmart. She was able to use the money to acquire the new TV since money serves as a

A. Contract
B. Medium of Exchange
C. Store of Value
D. Unit of Account

Look at graph for #15 and #16

15.B , 16.B

The "Law of Demand" implies that

A. If the price of a good increases, then the quantity demanded of the good will decrease
B. Demand curves should be "downward sloping"
C. Demand for a good will increase if consumers realize an increase in income
D. More than one (perhaps all) of the above answers is correct

A "seller's reservation price"

A. Refers to the maximum dollar amount a buyer is willing to pay for an item
B. Refers to the minimum dollar amount a seller is willing to accept in exchange for an item
C. Is visually illustrated by the vertical distance between the demand curve and the supply curve
D. More than one (perhaps all) of the above answers is correct

In a free market, the equilibrium quantity of trade and equilibrium price of a good are determined by

A. The interaction of both self-interested buyers and self-interested sellers in the marketplace
B. Only the buyers in the market
C. Only the sellers in the market
D. Neither buyers nor sellers, but rather by a government bureaucrat

?????? refers to the natural and undirected emergence of order out of chaos

A. Command Planning
B. Excess Demand
C. Spontaneous Order
D. An increase in Demand

The Basic Circular Flow Diagram builds upon the Preliminary Circular Flow Diagram by

A. Adding an illustration of the movement of money between households and firms, which facilitates the voluntary transfer of economic resources
B. Adding an illustration of how equilibrium price and quantity are each determined in a market
C. Adding an illustration of the role of government in collecting taxes from firms and households
D. Deleting the illustration of the old played by firms in the economy

The height of the demand curve at a particular quantity illustrates

A. Seller's reservation price for that unit
B. Buyer's reservation price for that unit
C. Magnitude of excess demand at the market equilibrium
D. Spontaneous order