ECON 1000 - How a Market System Functions (Flashcards)

A comprehensive set of practice flashcards covering money functions, demands and supplies, market equilibrium, shifts, determinants, profits, entrepreneurship, spontaneous order, I, Pencil, and the circular flow.

What are the three functions of money?

Medium of exchange, store of value, and unit of account.

How is demand defined in microeconomics?

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

How is supply defined in microeconomics?

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

What is the Law of Demand?

All else fixed, a higher price leads to a lower quantity demanded; demand curves slope downward.

What is the Law of Supply?

All else fixed, a higher price leads to a higher quantity supplied; supply curves slope upward.

What is a buyer's reservation price?

The maximum amount of money the buyer is willing to pay to acquire the item.

What is a seller's reservation price?

The minimum amount of money the seller is willing to accept to exchange the item.

What does equilibrium mean in a market context?

A stable state where quantity demanded equals quantity supplied; at equilibrium, no individual can gain by changing behavior at that price.

What is excess supply?

A situation where quantity supplied exceeds quantity demanded, leading to downward pressure on price.

What is excess demand?

A situation where quantity demanded exceeds quantity supplied, leading to upward pressure on price.

What is the horizontal interpretation of the demand curve?

Start from a given price and move horizontally to determine the corresponding quantity demanded.

What is the vertical interpretation of the demand curve?

Start from a given quantity demanded and move vertically to determine the corresponding price.

What is the horizontal interpretation of the supply curve?

Start from a given price and move horizontally to determine the corresponding quantity supplied.

What is the vertical interpretation of the supply curve?

Start from a given quantity supplied and move vertically to determine the corresponding price.

What is a market’s stable price called in the supply-demand model?

The equilibrium price, p*, where quantity demanded equals quantity supplied.

What does ‘self-enforcing’ mean in market equilibrium terms?

Prices tend to push toward equilibrium; if prices deviate, pressures move them back toward equilibrium.

What are the determinants of demand?

Prices of related goods (complements and substitutes), income (normal vs inferior), tastes, market size, and expectations of future prices.

What are the determinants of supply?

Costs of production, technology, natural events, market size, and expectations of future prices.

What is the role of profits in a free market economy?

Profits serve as a signaling device that directs resources to their most valuable use.

Who is an entrepreneur?

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

What is Spontaneous Order?

The natural, undirected emergence of order in a market without a central planner.

What are the three key insights from I, Pencil?

No single person possesses the know-how to make a pencil; most who helped did not intend to or care to make a pencil; yet the process occurs without a central planner.

What is the Circular Flow of Economic Activity?

Flows of factors of production from households to markets; incomes as wages and rents; households purchase finished goods; firms receive revenues and supply goods.

What is meant by equilibrium quantity and equilibrium price?

The quantity and price at which quantity supplied equals quantity demanded, i.e., the market clears.

Who wrote the essay I, Pencil?

Leonard Read.

What is the difference between a normal good and an inferior good?

Normal goods see demand rise with income; inferior goods see demand fall as income rises.

What do complements and substitutes mean in the determinants of demand?

Complements are goods consumed together; substitutes are competing goods; price changes in related goods affect demand.

If income rises for a normal good, in which direction does demand shift?

Rightward shift (increase in demand).

If production costs fall, in which direction does supply shift?

Rightward shift (increase in supply).