Deck 4: The Working of Competitive Markets

Question 1

If a firm is a price- taker it

A) has some ability to influence market price.
B) has no ability to influence market price.
C) has significant monopoly power.
D) all of the above could be true

Answer 1

has no ability to influence market price.

Question 2

Economists use the term 'perfect competition' for a situation where

A) consumers are price- takers and producers are price- makers.
B) all producers and consumers are price- takers.
C) all consumers are price- takers (but not necessarily producers).
D) all producers are price- takers (but not necessarily consumers).

Answer 2

all producers and consumers are price- takers.

Question 3

In a perfectly competitive market

A) only producers are price- makers.
B) all producers and consumers are price- makers.
C) only consumers are price- takers.
D) all producers and consumers are price- takers.

Answer 3

all producers and consumers are price- takers.

Question 4

A free market is a market with

A) goods that are free to the consumer but paid for by the government (e.g. schooling).
B) goods that are sold at no cost.
C) no government intervention.
D) government intervention to ensure the market price is affordable to all consumers.

Question 5

If a market is trading at an equilibrium price

A) the quantity demanded equals the quantity supplied.
B) there is no surplus or shortage of the good or service.
C) the price will not change in the future.
D) A and B

Question 6

Assume that there is a rise in the demand for a good. Ceteris paribus, this will result in

A) a rise in the price of the good, but a fall in the price of the factors used to make it.
B) a rise in the price of the good, but an unknown effect on the price of the factors used to make it.
C) a fall in the price of the good, but a rise in the price of the factors used to make it.
D) a fall in the price of the good and a fall in the price of the factors used to make it.
E) a rise in the price of the good and a rise in the price of the factors used to make it.

Question 7

The position at which a demand curve and supply curve cross defines the _________price and equilibrium _________.

A) demand; supply
B) equilibrium; quantity
C) best; balance
D) highest; expenditure

Question 8

The law of demand states that, other things being equal, a decrease in the price of a good will result in

A) a surplus.
B) an increase in the quantity willingly purchased.
C) a decrease in the quantity willingly purchased.
D) greater production of the good.

Question 9

Which of the following is held constant along a demand curve?

A) The price of substitute goods
B) Household income
C) Tastes and preferences
D) All of the above

Question 10

The quantity demanded of Pepsi^TM has decreased. This is most likely to be because

A) Coca Cola^TM prices have gone up.
B) Pepsi^TM prices have gone up.
C) Pepsi^TM consumers have more income.
D) Coca Cola^TM advertising is not as effective as it was.

Question 11

Consider the market for red jeans. If celebrities start to wear more and more red jeans, what will happen to the equilibrium price and quantity of them?

A) There will be a fall in both price and quantity.
B) There will be an increase in price and a fall in quantity.
C) There will be a fall in price and a rise in quantity.
D) There will be an increase in both price and quantity.

Question 12

Which of the following is not a determinant of demand?

A) Tastes
B) The profitability of other products
C) The price of substitute goods
D) Income
E) Distribution of income

Question 13

The following diagram shows the demand curve for a product shifting from D₀ to D₁. Which of the following could have caused this shift?

A) A fall in price of the product
B) A fall in price of a substitute product
C) A fall in income if the product is normal
D) A fall in price of a complementary product

Question 14

Which of the following might shift the demand curve for cinema tickets to the right?

A) An increase in income
B) A fall in the population
C) A decrease in the price of DVDs (a substitute)
D) An increase in the cost of the cinema car park (a complement)

Question 15

If a computer games addict became unemployed and decided not to buy as many computer games, economists would say that they were treating computer games as

A) a complementary good.
B) a substitute good.
C) an inferior good.
D) a normal good.

Question 16

Which one of the following would shift the demand curve for a commodity to the right?

A) The costs of production rise.
B) Consumer incomes fall.
C) The availability of complementary goods falls.
D) The price of a substitute good rises.
E) The price of the good falls.

Question 17

Which of the following might shift the demand curve for butter to the right?

A) A decrease in the price of butter
B) An increase in the price of bread (a complement)
C) An increase in income
D) A decrease in the price of margarine (a substitute)
E) A fall in the population

Question 18

Consider the market for good Z. What will be the effect of an increase in income?

A) A rightward shift in the demand curve
B) A leftward shift in the supply curve
C) A rightward shift in the supply curve
D) A leftward shift in the demand curve
E) Need more information to say

Question 19

Expectations about price changes will affect

A) the supply curve only.
B) both the demand and supply curves.
C) the demand curve only.
D) neither curve.

Question 20

An increase in supply, not caused by a change in market price, is represented by

A) a move up the given supply curve.
B) a rightward shift of the supply curve.
C) a move down the given supply curve.
D) A and C

Question 21

The cost of pressing DVDs has fallen. This will cause

A) an increase in market price.
B) a shift in the demand for DVDs.
C) a shift in the supply of DVDs.
D) none of the above

Question 22

A good harvest will cause

A) a rightward shift in the supply curve of wheat.
B) a movement down along the supply curve of wheat.
C) a movement up along the supply curve of wheat.
D) a leftward shift in the supply curve of wheat.

Question 23

If the cost of raw materials increases, the supply curve of a product will

A) become vertical.
B) become horizontal.
C) shift to the left.
D) not shift at all, but there will be a movement along the supply curve.
E) shift to the right.

Question 24

What will be the effect of the imposition of a tax on a product?

A) Leftward shift in supply
B) Rightward shift in demand
C) Leftward shift in demand
D) Rightward shift in supply

Question 25

Which one of the following would shift the supply curve for good X to the right?

A) The demand for goods in joint supply (e.g. by- products) goes down.
B) The costs of producing good X fall.
C) Good X now sells for a higher price.
D) The demand for good X rises.
E) The demand for alternative goods (i.e. which could be produced as an alternative to good X) goes up.

Question 26

Which of the following is the most likely cause of a fall in the supply of petrol?

A) A decrease in the cost of refining petrol
B) An increase in the price of diesel
C) An increase in the price of cars
D) An increase in bus drivers' wages

Question 27

Reasons for supply curves being positively sloped include

A) firms always want to raise prices to boost profits.
B) typically, as output rises unit costs rise, so price must also rise.
C) the higher the demand for a good the more firms can charge.
D) all of the above

Question 28

Which of the following is not a determinant of supply?

A) The profitability of goods in joint supply
B) Tastes
C) Expectations of future price changes
D) The aims of producers

Question 29

Which of the following will cause a shift in a supply curve?

A) An increase in the ability/productivity of the firm's workforce
B) A change in the profitability of alternative products
C) A change in hourly wage costs
D) All of the above

Question 30

If the market price is below equilibrium, then

A) there is excess demand.
B) there is excess supply.
C) the supply curve will shift to the right.
D) the demand curve will shift to the right.

Question 31

When excess demand occurs in a free market, there is a tendency for

A) the price to fall.
B) the price to rise.
C) the quantity demanded to rise.
D) the quantity supplied to fall.

Question 32

When excess supply occurs in a free market, market forces will result in

A) the quantity supplied falling.
B) the quantity demanded rising.
C) the price falling.
D) no shift in either demand or supply.
E) all of the above

Question 33

In a free market, if there is an increase in demand which cannot be met immediately, prices tend to rise. This allocates the goods to those who are willing and able to pay the most. Economists call this

A) quantity allocation.
B) price rationing.
C) equity.
D) a black market.

Question 34

The following diagram shows the demand for and supply of oil. The supply and demand curves are initially given by S₀ and D₀. The market is in equilibrium at point x. There is then a recession accompanied by political tensions in certain oil- producing countries that adversely affects oil production. As a result either or both the demand and supply curves shift to one of the new positions shown in the diagram. What will be the equilibrium position on the diagram?

A) Point n
B) Point r
C) Point m
D) Point p

Question 35

The following diagram shows the demand for and supply of apples. The supply and demand curves are initially given by S₀ and D₀. The market is in equilibrium at point x. There is then a rise in the price of pears and oranges and an increase in the costs of transporting fresh fruit. As a result either or both the demand and supply curves shift to one of the new positions shown in the diagram. What will be the equilibrium position on the diagram?

A) Point l
B) Point r
C) Point j
D) Point n

Question 36

If house prices rise faster than other prices, which of the following is the most likely explanation?

A) Rent controls have been imposed.
B) House owners are speculating.
C) Prices of other goods are falling.
D) Interest rates are rising.

Question 37

House prices have increased more quickly than consumer prices. This means that

A) prices of other goods have fallen.
B) there has been an increase in the real price of housing.
C) there has been a decrease in the real price of housing.
D) the price of housing has decreased relative to the average price of a basket of consumer goods.

Question 38

Which of the following are determinants of house prices?

A) The cost and availability of mortgages
B) Speculation
C) Income
D) The number of households
E) All of the above

Question 39

If interest rates rise, what will happen to the demand for housing?

A) There will be an increase in demand for housing because of a greater return on investing in housing.
B) There will be no change in the demand for housing as interest rates have no effect on demand and instead shift the supply curve.
C) There will be a rise in demand for housing because of the greater availability of mortgages.
D) There will be a decrease in demand for housing because of a higher cost of servicing the mortgage debt.

Question 40

Consider the market for new flats. What will be effect on demand and supply if flat living becomes more fashionable?

A) No shift in demand
B) A rightward shift in demand and a leftward shift in supply
C) A rightward shift in demand and no shift in supply
D) A rightward shift in demand and a rightward shift in supply

Question 41

Which of the following will cause a rise in the demand for shares?

A) An increase in the interest rate on savings in banks and building societies
B) A fall in the dividend yield
C) A rise in income, when there is a positive wealth effect
D) An expectation that share prices will soon fall

Question 42

A perfectly competitive market is one in which both producers and consumers are price- takers.

Question 43

If there is a surplus in a free market, price will fall until the market has cleared.

Question 44

A surplus in a market will normally cause price to rise.

Question 45

A shortage in a market will normally cause price to rise.

Question 46

When prices change and this makes customers financially better or worse off, this is called 'the income effect of the price change'.

Question 47

A change in the distribution of income will cause the demand curve to shift.

Question 48

The law of demand says that if price rises, quantity demanded will fall.

Question 49

The demand schedule for an individual shows how their purchases of a good will change as their income changes.

Question 50

Two goods are complementary if the price of one goes up and then the demand for both falls.

Question 51

The substitution effect refers to the effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of the price change.

Question 52

A good whose demand falls when people's income rises is called an inferior good.

Question 53

Inferior goods are best defined as goods whose demand falls as people's income rises.

Question 54

The term 'goods in joint supply' refers to a situation where more of the production of one good leads to more of the production of another good (e.g. petrol and other grade fuels).

Question 55

If a supply change results in a change in the amount that customers buy, this is termed 'a change in quantity demanded' by economists.

Question 56

If a determinant of supply changes, other than price, then the supply curve will shift.

Question 57

If high street shops lower the price of televisions, the demand curve for televisions will shift to the right.

Question 58

The supply curve of an inferior good is negatively sloped.

Question 59

If there is a shortage in a market, this will usually cause both demand and supply curves to shift upwards.

Question 60

If house owners expect house prices to rise, the resulting speculation will make house prices rise faster than they would otherwise have done.

Question 61

If dividend yields on Sainsbury's shares are expected to rise, there will be an increase in Sainsbury's share prices, ceteris paribus.

Question 62

How and why are shortages and surpluses eliminated and equilibrium restored in a market? Use an example to explain how the goods and factor markets are interdependent?

Question 63

What is the price system?

Question 64

Explain why a demand curve has a negative slope.

Question 65

What is meant by the income and substitution effects of a price change?

Question 66

What might cause a demand curve to shift?

Question 67

The price of blue staplers rises and yet it is observed that the sales of red staplers increase. Does this mean that the demand curve for red staplers is upward- sloping?

Question 68

A rise in population would cause the market demand curve for a normal good to shift to the right. Explain how changes in three other variables could shift a market demand curve to the right.

Question 69

Explain why a supply curve has a positive slope.

Question 70

A fall in hourly wages would cause a market supply curve for a good to shift to the right. Explain how changes in two other variables could shift a market supply curve to the right.

Question 71

What might cause a supply curve to shift?

Question 72

What are the main determinants of supply?

Question 73

Explain how the price mechanism would cause a market with a surplus of goods/services to move towards equilibrium.

Question 74

Explain how the fall in the market price of one good will influence the market of a substitute product.

Question 75

What are normal and inferior goods?

Question 76

Draw a demand and supply curve for a good of your choosing. Explain how a increase in household income would affect the equilibrium price and quantity.

Question 77

House prices, like all prices, are determined by demand and supply. Discuss what specific determinants caused house prices to rise rapidly in the 1980s, fall in the 1990s, rise rapidly again through to 2007 and then start falling again.