How Markets Work Practice Quiz

This answer is correct because market prices and quantities are determined by the interaction of supply and demand. It reflects how equilibrium is achieved when buyers' demand meets sellers' supply.

Market equilibrium occurs when the quantity that sellers are willing to supply equals the quantity that buyers are willing to buy. This balance results in a stable market price.

A price ceiling is a regulatory measure that sets the highest price that can be charged for a product. It is aimed at preventing excessively high prices and making goods affordable.

A price floor is a minimum limit set by government intervention in the market. It is intended to prevent prices from falling too low, thereby protecting producers.

Consumer surplus is the extra benefit that consumers receive when they pay less for a product than the maximum amount they are willing to pay. It measures the added value and benefit consumers obtain in a market transaction.

An increase in demand shifts the demand curve to the right, causing the market equilibrium to adjust. As a result, prices and quantities both increase until a new equilibrium is reached.

Technological advancements that lower production costs shift the supply curve rightward. This increases the quantity supplied at every price level and typically leads to lower costs and prices.

Price elasticity of demand measures consumers' responsiveness to price changes. With elastic demand, an increase in price causes a significant drop in quantity demanded, reducing revenue, whereas inelastic demand indicates less change, potentially increasing revenue when prices rise.

A subsidy lowers production costs, encouraging producers to increase supply. This results in a rightward shift in the supply curve, generally leading to lower prices and higher quantities sold in the market.

Negative externalities impose external costs on society that are not reflected in market prices, resulting in overproduction. This leads to inefficiencies because the true cost of production is higher than the private cost borne by producers.

A perfectly competitive market is defined by many small firms producing identical products and no barriers to entry or exit. These features ensure that no single firm can influence the market price.

Normal goods are sensitive to changes in consumer income. When income rises, consumers purchase more of the good, shifting the demand curve rightward and increasing market demand.

Prices provide information about scarcity and consumer preferences, helping allocate resources efficiently. They balance supply and demand by signaling when to increase or decrease production.

Government intervention can correct inefficiencies that arise from market failures such as externalities and public goods. By addressing these issues, the government can help align private incentives with social welfare.

A binding price floor prevents prices from falling to equilibrium levels, resulting in a higher quantity supplied than demanded. This creates a surplus as consumers are less willing to buy at the artificially high price.

When both curves shift rightward, the increase in demand tends to push prices up while the increase in supply tends to push prices down, leading to an ambiguous effect on price. However, the overall shift results in an increased equilibrium quantity.

Consumer welfare is impacted by how the tax burden is shared between buyers and sellers. In markets where demand is inelastic, consumers are less responsive to price changes and therefore bear a larger proportion of the tax, negatively affecting their overall welfare.

Price signals reflect the relative scarcity and value of goods, enabling consumers and producers to make decisions that are in their best interest. This decentralized process allows for an efficient allocation of resources without the need for central planning.

Public goods, being non-excludable, suffer from underfunding as individuals free ride on the benefits, while negative externalities impose additional social costs not borne by the producer. This divergence between private and social costs or benefits causes the market to fail at providing optimal outcomes.

Imperfect information can result in misjudgments regarding the value or quality of a product, leading to decisions that do not align with actual market conditions. This misallocation of resources can cause persistent inefficiencies and prevent the market from reaching an optimal equilibrium.