Market Structures
What is the main characteristic of perfect competition?
Many small firms selling identical products with no control over price.
What is the law of demand?
As price increases, quantity demanded decreases, ceteris paribus.
What does PED stand for in economics?
What does PED stand for in economics?
What is a price ceiling?
A maximum price set below equilibrium to make goods more affordable.
Name one macroeconomic objective.
Economic growth, price stability, low unemployment, etc.
What is the term for a market with only one seller and high barriers to entry?
Monopoly.
Name one non-price determinant of demand.
Income, tastes, price of related goods, etc
How is PED calculated?
Percentage change in quantity demanded divided by the percentage change in price
What is the purpose of subsidies?
To lower production costs and encourage output or consumption
What is meant by full employment?
The level of employment where all who are willing and able to work can find a job.
Name one example of product differentiation in monopolistic competition.
Brand names, quality differences, packaging, etc.
What is the term for a movement along the demand curve caused by a change in price?
Expansion or contraction.
Name one determinant of PED.
Availability of substitutes, proportion of income spent, etc.
Name an example of a negative externality.
Pollution, noise from a factory, etc
Define inflation.
A sustained increase in the general price level over time.
What is collusion, and in which market structure is it most likely to occur?
Collusion is when firms agree to limit competition, often in an oligopoly.
Explain what causes a supply curve to shift to the left.
Increased costs of production, fewer suppliers, etc.
What is the difference between inelastic and elastic demand? Provide coefficient values.
Inelastic: PED < 1; Elastic: PED > 1
How can governments correct market failure from a negative externality?
Indirect taxes, regulation, subsidies for alternatives, etc
What is the business cycle?
The short-term fluctuations of GDP around its long-term trend.
Explain why allocative efficiency is achieved in perfect competition but not in a monopoly.
In perfect competition, price equals marginal cost (P=MC), ensuring resources are allocated efficiently. Monopolies restrict output and set prices above MC, leading to allocative inefficiency.
Using a pen and paper, illustrate how excess demand leads to a rise in price and a new equilibrium in a market.
Market forces cause price to rise, reducing quantity demanded and increasing quantity supplied until equilibrium is reached.
Why is the PED of primary commodities generally lower than manufactured goods?
Primary commodities have fewer substitutes and are often necessities.
Explain how tradable permits work to reduce pollution.
Permits cap the total pollution allowed, and firms trade permits, incentivizing less pollution.
Explain one limitation of GDP as a measure of economic well-being.
Excludes non-market activities, does not account for income inequality, etc.