25.Why are profit opportunities considered as factors that influence the quantity supplied?

If a business firm produces more than one product, a change in the price of one product can change the supply of another product. For example, automobile manufacturers can produce both small and large cars. If the price of small cars rises, the producers will produce more small cars to earn higher profits. They will shift the resources of the plant from the production of large cars to the production of small ones. Therefore, the supply of small cars will increase and a supply curve will shift outward. So, profit opportunities encourage producers to produce those goods that have high prices.

26.Why do potential producers start producing a product?

27.What is the effect of more producers entering the market for a certain product?

28.What is elasticity as an economic concept?

An important concept in understanding supply and demand theories is elasticity. Elasticity of supply: The degree to which supply of a commodity responds to a change in that commodity’s price

29.Why is elasticity important in understanding supply and demand theories?

Comprehension of elasticity is useful to understand the response of supply to changes in consumer demand in order to achieve an expected result or avoid unforeseen consequences.

30.What is the price elasticity of supply?

In economics, the price elasticity of supply is the degree of proportionality with which the amount of a commodity offered for sale changes in response to a given change in the going price. In other words elasticity of supply is a measure of how much the quantity supplied of a particular product responds to a change in the price of that product.

31.When supply is elastic?

Supply is elastic if a change in price results in a large change in the quantity supplied.

32.What supply is called inelastic? On the other hand, if a great change in price brings about a small change in the quantity supplied, supply is called inelastic.

33.What are the determinants of price elasticity of supply? There are some factors that determine price elasticity of supply. The most important of them are the ability of producers to change the amount of goods they produce, time period needed to alter the output and others.

Market Equilibrium The Functions of the Price System

In a Market Economy

1.What is a price?

Price: the money value of goods and services. price, i.e. the amount of money for which a unit of goods or services is sold and bought.

2.Why are prices the key ingredients in a market economy? Prices are the key ingredients in a market economy because they make things happen. If buyers want to own some items badly, they will pay more for them. When sellers want to sell some items badly, they will lower their prices. Prices play such an important role in economic life that most democracies are often described as price-directed market economies.

3.What is a price system?

The price system lies at the heart of any society. The price system is an economic system where prices are not set by government but by the interaction of supply and demand. Under such a system every commodity and every service has a price, i.e. the amount of money for which a unit of goods or services is sold and bought.

4.What is a price for any commodity determined by in a free market?

5.What functions do prices perform?

6.How do prices ration scarce resources?

7.How do prices perform production-motivating function?

8.Why do economists stress the importance of the price system in answering the fundamental economic questions?

9.Why do prices act as signals to buyers and sellers?

10.In what way does the price system provide answer to the question of What to produce?

11.Why cannot producers ignore consumer demand?

12. What is the correlation between prices and production?

13. How does the price system provide answer to the How question?

14. Why do producers do their best to reduce production costs?

15. What is the producers’ main incentive?

16. How does the price system distribute society’s output among the people?

17. Why does the price system determine each person’s income?

18. Why do some buyers go home empty handed?

19.What is an equilibrium price? An equilibrium price (also known as a market price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands.

20. Why is it important to find equilibrium prices in markets?

21. Why does the law of demand put limits on suppliers while consumers are limited by the law of supply?

22.What does market clearing refer to?

Thus, market clearing refers to an assumption that markets always go to where the quantity supplied is equal to the quantity demanded.

23.What is excess supply? At prices above the equilibrium price, the quantity supplied exceeds the quantity demanded, so a surplus or excess supply develops. Excess supply (surplus): the amount of a product available at a price higher than the market price.

24. What process occurs to bring the market back into equilibrium, when there is a surplus in the market?

25. What are the ways of reallocating resources when the established price is below the market equilibrium?

26. What is a shortage and when does it develop?

27. What process occurs to bring the market back into equilibrium, when there is excess demand in the market?

28. What is the difference between scarcity and shortage?

29. What does a decrease in demand lead to?

30. What does an increase in supply result in?

MARKET STRUCTURES

AND THEIR KEY CHARACTERISTICS

1.What is a market? Market is an actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact (directly or through intermediaries) to trade goods and services.

2. When is market created?

Market is created when there is the seller, the buyer, the price, the product and competition, the cornerstone of the free enterprise system.

3. What is competition?

Competition: The rivalry between suppliers in the same market, usually in selling at the lowest price or in giving better quality or generally offering better value for money.

4. What is a competitive market?Competitive market: One in which there is only one price for a given commodity at any one time; all buyers and sellers know the market conditions.

5. What characteristics define the structure of a market?

Market structure can be defined in terms of* the number and the power of the buyers and sellers, the nature of the product (product differentiation), barriers to entry and exit, and availability of information

. 6. What are the principal types of market structures? The principal types of market structures are perfect competition, monopolistic competition, oligopoly, and monopoly.

7. What is perfect competition?

Perfect (Pure) Competition: A market for uniform products in which there many buyers and sellers, no one of which is big enough to affect the price, and has full knowledge of market conditions

8. What are the features of perfect competition?

There are a lot of buyers and sellers purchasing and selling exactly the same commodity. Identical commodity is offered for sale. Each buyer or seller has perfect knowledge of market prices and quantities meaning There are no barriers to enter or exit the market.

9. Why can no individual alter the market price? There are a lot of buyers and sellers purchasing and selling exactly the same commodity. It means that no one buyer or seller can affect the market price by entering or leaving the market. They can accept the market price or reject it.

10. What does an identical commodity offered for sale denote?

It denotes that all units of the commodity are the same in the minds of buyers and they must be willing to purchase it from the seller who offers this product at the lowest price.

11. Why do sellers compete with sellers and buyers with buyers? Each buyer or seller has perfect knowledge of market prices and quantities meaning that all of them are completely aware of* the prices and quantities at which transactions are taking place in the market. This permits buyers to compete with buyers, and sellers with sellers.