Understanding Key Concepts in Microeconomics
Demand refers to the quantity of a product or service that consumers are willing and able to purchase at a given price level, during a particular period of time. It is an expression of the desire of buyers to acquire goods or services. The law of demand states that as the price of a good increases, the demand for it will decrease, and vice versa.
2. What is supply ?
Ans. Supply refers to the quantity of a product or service that producers are willing and able to offer for sale at a given price level, during a particular period of time. It is an expression of the availability of goods or services in the market. The law of supply states that as the price of a good increases, the supply of it will also increase, and vice versa.
3. What is equilibrium price ?
Ans. Equilibrium price is the price at which the quantity of a product or service that consumers are willing to buy equals the quantity that producers are willing to supply. It is the price at which the market is in balance, with no excess demand or supply. At this price, the demand curve intersects the supply curve, and the market reaches equilibrium.
4. What is elasticity ?
Ans. Elasticity refers to the responsiveness of the quantity demanded or supplied to changes in the price of a good. It measures how much the quantity demanded or supplied will change in response to a change in price. Elastic demand means that a small change in price will lead to a large change in the quantity demanded, while inelastic demand means that a large change in price will lead to a small change in the quantity demanded.
5. What is the difference between perfect competition and monopoly ?
Ans. Perfect competition refers to a market structure in which there are many buyers and sellers, and no single buyer or seller has the power to influence the market price. In a perfectly competitive market, firms produce at the minimum point of their average cost curve, and the market reaches equilibrium through the intersection of the supply and demand curves. Monopoly, on the other hand, refers to a market structure in which there is only one seller of a product, and the seller has the power to set the market price. In a monopolistic market, the firm produces where marginal revenue equals marginal cost, and the market does not reach equilibrium through the intersection of the supply and demand curves.
6. What is the difference between a price ceiling and a price floor ?
Ans. A price ceiling is a government-imposed limit on the maximum price that can be charged for a good or service. It is intended to protect consumers from high prices, but it can also lead to shortages and black markets. A price floor, on the other hand, is a government-imposed minimum price that must be charged for a good or service. It is intended to protect producers from low prices, but it can also lead to surpluses and inefficiency.
7. What is the difference between a subsidy and a tax ?
Ans. A subsidy is a payment made by the government to a producer or consumer to encourage the production or consumption of a good or service. It is intended to reduce the cost of the good or service, but it can also distort the market and lead to inefficiency. A tax, on the other hand, is a payment made by a producer or consumer to the government, and it can be used to discourage the production or consumption of a good or service. It can also be used to raise revenue for the government.
8. What is the difference between a cartel and a monopoly ?
Ans. A cartel is an agreement among firms to fix prices and restrict output, with the intention of maintaining their market power and profits. It is illegal in most countries, but it can still lead to inefficiency and exploitation of consumers. A monopoly, on the other hand, is a market structure in which there is only one seller of a product, and the seller has the power to set the market price. While both cartels and monopolies can lead to inefficiency and exploitation of consumers, monopolies are generally considered to be more harmful because they have complete control over the market.
9. What is the difference between perfect competition and oligopoly ?
Ans. Perfect competition refers to a market structure in which there are many buyers and sellers, and no single buyer or seller has the power to influence the market price. Oligopoly, on the other hand, refers to a market structure in which there are only a few buyers and sellers, and each firm has some degree of market power. In an oligopolistic market, firms may engage in strategic behavior, such as price wars or collusion, in order to gain a competitive advantage over their rivals.
10. What is the difference between a monopolistically competitive market and a perfectly competitive market ?
Ans. A monopolistically competitive market refers to a market structure in which there are many firms producing differentiated products, but no single firm has the power to influence the market price. In this type of market, firms compete on the basis of product differentiation and advertising, rather than on price. A perfectly competitive market, on the other hand, refers to a market structure in which there are many buyers and sellers, and no single buyer or seller has the power to influence the market price. In this type of market, firms produce at the minimum point of their average cost curve, and the market reaches equilibrium through the intersection of the supply and demand curves.
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