Download Unit II Study Guide*-How Markets Work

Unit II Study Guide*-How Markets Work
Unit Summary: Macroeconomics includes the basic concepts of demand, supply, price
and market structures. In addition, it applies these concepts to the laws of demand and
supply, demand and supply schedules and curves, elasticity of demand and supply, how
business and markets set prices, price regulation, competitive and noncompetitive market
structures and market regulation.
Big Ideas:
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There is an inverse relationship between price and quantity demanded: an increase in
price decreases the quantity demanded for a good or service, while a decrease in prices
increases the quantity demanded. Elasticity of demand determines the degree of change.
There is a direct relationship between price and quantity supplied: an increase in price
increases the quantity supplied, while a decrease in prices decreases the quantity
supplied. Elasticity of supply determines the degree of change.
Over time, factors other than price can affect demand or supply for a product or service.
Profits, productivity and the costs of production affect production decisions.
Price for a product or service occurs at equilibrium, a point where quantity supplied by
producers and quantity demanded by consumers is equal, meeting the needs of both
buyers and sellers. In a market economy, prices tend to seek equilibrium, unless the
government institutes price floors or price ceilings.
Domestic and international competition in a market economy affects goods and services
produced and the quality, quantity, and price of those products.
Essential Questions:
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How do the laws of supply and demand affect the economy—choices, scarcity, price and
quantity?
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How are prices determined in a market economy?
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How does price allocate scarce goods within a market economy?
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What happens to buyers and sellers when governments attempt to establish price
controls?
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How does profit influence entrepreneurial and production decisions?
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What are the functions of economic markets (the “marketplace”), and what effects do
competition have on these markets?
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What might cause price to be above or below equilibrium, and what does the market do to
correct the situation?
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Explain the law of demand, with regard to the relationship among income effect,
substitution effect and diminishing marginal utility.
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Describe the consequences of the major methods the government uses to intervene in the
marketplace, taxes, subsidies and regulation.
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Explain how the change in the price of a product affects demand for its substitute goods
and its complementary goods.
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Describe briefly how taxes and subsidies affect supply.
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Describe the differences between fixed costs and variable costs.
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Illustrate how the price system responds to surpluses.
Topics/Terms:
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Demand
Law of demand
Substitution effect
Income effect
Demand schedule
Market demand
schedule
Demand curve
Ceteris paribus
Normal good
Inferior good
Complements
Substitutes
Elasticity of demand
Inelastic
Elastic
Unitary elastic
Total revenue
Supply
Law of supply
Quantity supplied
Supply schedule
Variable
Market supply
schedule
Supply curve
Market supply curve
Elasticity of supply
Marginal product of
labor
 Increasing marginal
returns
 Diminishing marginal
returns
 Fixed cost
 Variable cost
 Total cost
 Marginal cost
 Marginal revenue
 Operating cost
 Subsidy
 Excise tax
 Regulation
 Equilibrium
 Disequilibrium
 Excess demand
 Excess supply
 Price ceiling
 Price floor
 Rent control
 Minimum wage
 Surplus
 Shortage
 Search costs
 Supply shock
 Rationing
 Black market
 Spillover costs
 Perfect competition
 Commodity
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Barrier to entry
Imperfect competition
Start-up costs
Monopoly
Economies of scale
Natural monopoly
Government
monopoly
Patent
Franchise
License
Price discrimination
Market power
Monopolistic
competition
Differentiation
Nonprice competition
Oligopoly
Price war
Collusion
Price fixing
Cartel
Predatory pricing
Antitrust laws
Trust
Merger
Deregulation
Short-Answer Questions—some or all will be used as short-answer questions on the exam:
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Explain the difference between demand and quantity demanded.
Explain how the change in the price of a product affects demand for its substitute goods
and its complementary goods.
Give examples of what types of products tend to have elastic demand; inelastic demand.
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Describe the law of supply.
Describe what type of products tend to have an elastic supply.
Describe the determinants of supply.
Describe how taxes and subsidies affect supply.
Describe the differences between fixed costs and variable costs.
How does productivity influence supply decisions?
Illustrate how the price system responds to surpluses and shortages.
Describe the four conditions that must exist for a market to be perfectly competitive.
Compare the characteristics of oligopolies and monopolies.
Why did the federal government pass the Sherman Antitrust Act and other antitrust
legislation?
Challenge Your Thinking:
 Of the 5 non-price determinants of demand—consumer tastes and preferences, market
size, income, prices of related goods, consumer expectations—explain which three
are the most compelling…and why.
 Analyze the probable results of a government policy placing a $1 price ceiling on a gallon
of milk and a $5 price floor on a bushel of wheat.
 Summarize why determining demand elasticity is important in economics.
 Explain the law of diminishing returns and discuss how it is illustrated by the total product
curve.
 What are the advantages and disadvantages of the minimum wage for workers?
*Applicable California Economic Standards:
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12.1.3: Students understand common economic terms and concepts and economic
reasoning.
12.3.1, 12.2.2: Students analyze the influence of the federal government on the American
economy.
12.2.1, 12.2.2, 12.2.4, 12.2.5, 12.2.6, 12.2.7, 12.2.10: Students analyze the elements of
America's market economy in a global setting.
12.4/1, 12.4.3: Students analyze the elements of the U.S. labor market in a global setting.
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