1.2 The Role of Markets

• A market is a place or mechanism where buyers and sellers come together to exchange
• The equilibrium price is the point where supply and demand are equally balanced
• What is a market defined as?

  Exchange of goods and services
• Markets drive economic growth by incentivizing innovation and cost reduction
• What are the different types of markets categorized by trading activity?

  Product, factor, local, national, global
• The forces of supply and demand determine the equilibrium price and quantity
• Price signals convey information about supply and demand
• What are some causes of market failures?

  Externalities, public goods, asymmetries
• The forces of supply and demand determine the equilibrium price and quantity of goods and services


  True
• Price signals inform about market conditions, indicating scarcity or surplus


  True
• What are the primary functions of markets?

  Resource allocation and trade facilitation
• Markets ensure resources are used effectively and prices reflect true market values.


  True
• What is an example of a global market?

  Foreign exchange markets
• Order the market conditions based on price, demand, and supply:

  1️⃣ High price, low demand, high supply (Surplus)

  2️⃣ Low price, high demand, low supply (Shortage)

  3️⃣ Equilibrium price, balanced supply and demand
• Market efficiency occurs when the marginal benefit to consumers equals the marginal cost to producers
• Match the market type with its description:

  Product Markets ↔️ Exchange goods and services for consumption

  Factor Markets ↔️ Trade factors of production

  Local Markets ↔️ Operate within a specific area

  National Markets ↔️ Cover the entire country

  Global Markets ↔️ Extend across international borders

  Physical vs. Virtual Markets ↔️ Exist physically or online
• Price signals direct resources to their most valuable uses through adjustments in equilibrium
• The equilibrium price is the point where supply and demand are balanced.


  True
• What example is given for the allocation of resources function of markets?

  Increased demand for electric vehicles
• Factor markets trade factors of production such as land, labor, and capital.


  True
• What is the equilibrium condition in a market?

  Supply and demand intersect
• Price signals guide consumer decisions towards more affordable or available goods.


  True
• What is an example of a market failure due to external costs?

  Pollution from production
• Markets determine equilibrium prices through the process of price discovery
• Steps in the interaction of supply and demand

  1️⃣ Demand decreases as price increases

  2️⃣ Supply increases as price increases

  3️⃣ Surplus occurs if price is too high

  4️⃣ Shortage occurs if price is too low

  5️⃣ Equilibrium is reached when supply equals demand
• A market facilitates the allocation of resources through interactions that determine the equilibrium price based on supply and demand
• Match the function of markets with its description:

  Allocation of Resources ↔️ Directs resources to most valuable uses

  Price Discovery ↔️ Determines equilibrium prices

  Facilitation of Trade ↔️ Connects buyers and sellers

  Incentives for Efficiency ↔️ Promotes innovation and cost reduction
• Product markets exchange goods and services for consumption
• As price decreases, demand typically increases.


  True
• What is one function of price signals in a market?

  Indicate scarcity or surplus
• The production of pollution creates negative externalities not reflected in the market price.


  True