Economics Chapter 4-7 Test Review

flash cards for the test :)

demand

the desire to own something and the ability to pay for it

law of demand

consumers will buy more of a good when its price is lowered and less when its price is higher

substitution effect

when consumers react to an increase in a good’s price by consuming less of that good and more of a substitute good

income effect

the charge in consumption that results when a price increases causes real income to decline

elasticity of demand

a measure of how consumers respond to price changes

if prices rise and income stays the same, what is the effect on demand?

demand goes down

how does the substitution effect work when the price of an item drops?

people will buy less of the substitution and more of the original good

what does it mean when you have demand for a good or service?

have the desire and ability to buy something

how might advertising lead to a shift in the demand curve?

more demand in the product being advertised/helps to create fads and trends

what does elasticity of demand measure?

measures how consumers respond to a change in price

quantity supplied

the amount that a supplier is willing and able to supply at a specific price

supply

the amount of goods available

law of supply

producers offer more of a good as its price increases and less as its price falls

when the price of a product goes down, what happens?

the suppliers will produce less and when the price goes up, they will produce more

a graph of the information in a supply schedule creates which of the following?

supply curve

how is the total cost of a factory or other production site determined?

fixed cost + variable cost

how is profit determined?

total revenue - total cost = profit/loss

how does specialization affect production?

makes production more efficient

in general, what happens to the price of a good or service when a shortage of that good or service occurs?

prices go up

if a baker’s supply of bread exceeds the demand for bread, he should…

lower the price of bread

in what ways does the government control markets?

price ceilings and price floors

what is the government’s goal in buying excess crops of other agricultural products?

trying to keep prices from falling

what happens to the price of a good or service when there is excess demand?

prices go up

what is a main principle of Adam Smith’s *The Wealth of Nations?*

when is a market at equilibrium?

quality demand = quality supplied

barrier to entry

any factor that makes it difficult for a new firm to enter the market

merger

when two or more companies join to form a single firm

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

natural monopoly

a market that runs most efficiently when one range firm supplies all of the outputs

oligopoly

a market structure in which a few large firms dominate a market

monopoly

a market in which a single seller dominates

why does a perfectly competitive market require many participants as both buyers and sellers?

no individual can control prices

what is the relationship between start-up costs and a competitive market?

the higher the costs = less competitive/lower costs = more competitive

patents are a form of monopoly that society allows because they…

encourage innovation

why does the government give copyrights to artists?

gives the artists control of their work

which of these businesses have the advantage of economies of scale?

large corporations

a major characteristic of monopolistic competition is that price will be…

higher in a competitive market but lower in monopolistic market

what can the government do to keep monopolies from being formed?

block mergers

what is the intent of both deregulation and antitrust laws?

to increase competition