Econ Test 2 Exam

What is a market?

A market is a group of buyers and sellers of a particular good or service.

What is a competitive market?

A market with many buyers and sellers where each has little or no influence on the market price.

What is market power?

The ability of a single buyer or seller to influence the market price.

What is a monopoly?

A market with only one seller who controls the price of a good or service.

What is the difference between quantity demanded and demand?

Quantity demanded is the amount consumers will buy at a specific price; demand is the entire relationship between price and quantity demanded.

What is a demand schedule?

A table showing the relationship between price and quantity demanded.

What is a demand curve?

A graph showing how quantity demanded changes as price changes.

What is the law of demand?

As price rises, quantity demanded falls; as price falls, quantity demanded rises (ceteris paribus).

Why does the law of demand exist?

Because of the substitution effect and the income effect.

Can you create market demand functions from individual demand functions?

Yes, by summing individual demand curves horizontally (adding quantities at each price).

What factors cause changes in quantity demanded?

Only a change in the good’s own price.

What factors shift demand?

Changes in income, tastes, prices of related goods, expectations, or number of buyers.

What is supply?

The relationship between price and the quantity producers are willing to sell.

What is a supply schedule?

A table showing how much producers will supply at different prices.

What is a supply curve?

A graph showing the relationship between price and quantity supplied.

What causes supply to shift?

Changes in input prices, technology, expectations, number of sellers, or government policies.

What is a shortage?

When quantity demanded exceeds quantity supplied (price is below equilibrium).

What is a surplus?

When quantity supplied exceeds quantity demanded (price is above equilibrium).

What is equilibrium in the supply-demand model?

The point where quantity demanded equals quantity supplied.

What is a price ceiling?

A legal maximum on the price of a good or service (e.g., rent control).

What is a price floor?

A legal minimum on the price of a good or service (e.g., minimum wage).

What are effects of price ceilings?

Shortages, black markets, reduced product quality, and inefficiency.

What are effects of price floors?

Surpluses, wasted resources, and inefficiency (e.g., unemployment from high minimum wages).

Can you analyze price floors and ceilings graphically?

Yes—draw the legal price line, determine shortages or surpluses, and calculate welfare losses (CS, PS, DWL).

How can these concepts be applied to rent control and minimum wage?

Rent control is a price ceiling → housing shortages; minimum wage is a price floor → possible unemployment.

How do the effects of price controls change over time?

Shortages or surpluses often grow as supply and demand become more elastic.

Is the analysis of price controls mainly theoretical or empirical?

It’s mainly theoretical—models predict outcomes; empirical analysis uses data to test them.

What distinguishes theory from empirical analysis?

Theory uses models and assumptions to explain or predict; empirical analysis tests those predictions with real