MICRO TEST 1:
Economics
Economizing Problem
Resources (Inputs)
Capitalism
Market
Law of Demand
Law of Supply
Equilibrium
Price Mechanism
Surplus
Shortage
Change in Quantity Demanded
Change in Demand
Change in Quantity Supplied
Demand Curves are negatively sloped because of the Law of
Demand which states there is a negative (or inverse) relation
between price and the quantity demanded.
This means that lower prices enable and encourage consumers to purchase more goods.
But higher prices disable and discourage consumers from purchasing goods.
Consumers like low prices.
Supply Curves are positively sloped because of the Law of
Supply which states there is a positive (or direct) relation between price and the quantity supplied.
This means that higher prices enable and encourage producers to provide more goods.
But lower prices disable and discourage producers from providing goods.
Producers like high prices.
Supply and Demand Together
Price Quantity $0.00 0 0.50 0 1.00 1 1.50 4 2.00 7 2.50 10 3.00 13 Price Quantity $0.00 19 0.50 16 1.00 13 1.50 10 2.00 7 2.50 4 3.00 1
Demand Schedule Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied!
Supply Demand Price of Ice-Cream Cone Quantity of Ice-Cream Cones Equilibrium of Supply and Demand
2
1 3 4 5 6 7 8 9 101112 0 $3.00 2.50 2.00 1.50 1.00 0.50 Equilibrium
In Free Markets the Equilibrium is found by a negotiation between buyers and sellers.
This negotiation is called the Price Mechanism.
Note: The equilibrium price is the price per-unit at which goods will actually be exchanged, while the equilibrium quantity is the actual amount of goods thatwill be exchanged.
Demand Curve $3.00 2.50 2.00 1.50 1.00 0.50 2
1 3 4 5 6 7 8 9 101112 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0
P r ic e Q u a n t it y $ 0 . 0 0 1 2
0 . 5 0 1 0
1 . 0 0 8
1 . 5 0 6
2 . 0 0 4
2 . 5 0 2
3 . 0 0 0
Supply Curve $3.00 2.50 2.00 1.50 1.00 0.50 2
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones 2
1 3 4 5 6 7 8 9 10 1112 0
$3.00
2.50
2.00
1.50
1.00
0.50
Supply
Demand
Surplus SURPLUS
Surplus
-When the price is above the equilibrium price, the quantity supplied exceeds the quantity
demanded. There is asurplus.
-Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
A surplus will not persist in a free market; however, if government placed a minimum price above an agreed upon equilibrium price, it would cause a persistent surplus.
SHORTAGE
Quantity of Ice-Cream Cones Price of
Ice-Cream Cone
$2.00
0 1 2 3 4 5 6 7 8 9 10 11 12 13 Supply
Demand $1.50
Shortage
Shortage
-When the price is below the equilibrium price, the quantity demanded exceeds the quantity
supplied. There is ashortage.
- Suppliers will raise the price because too
many buyers are chasing too few goods, thereby moving toward equilibrium.
A shortage will not persist in a free market; however, if government placed a maximum price below an agreed upon equilibrium price, it would cause a persistent shortage.
Shifts in Curves versus Movements along Curves:
Changes in Demand
0
D1 Price of
Ice-Cream Cone
Quantity of Ice-Cream Cones D3
D2 Increase in
demand
Decrease in demand
It’s caused by a change in a determinant other than price. These determinants include:
consumer tastes, consumer income, the number of consumers, prices of substitutes, prices of complements, taxes and expected prices.
Change in Quantity Supplied
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones 0
S
1.00 A
C
$3.00 A rise in the price of
ice cream cones results in a movement
along the supply curve.
Notice that a Change in Supply is a shift of the supply curve, either to the left or right. It’s caused by a change in a determinant other than price. These other determinants include:
costs of production, productivity, the number of producers, prices of alternative goods, prices of by-products, taxes, and expected prices.
Practice for Test #1:
_______What is the study of how we allocate our resources? A) Sociology B) Economics C) Macroeconomics D) all of the above
_______Which of the following is NOT a type of resource? A) land B) labor C) capital D) inputs E) entrepreneurial ability
_______Which of the following may cause a shift in Demand? A) changing tastes
A) changing price C) changing costs of production D) all of the above
_______Which variable may cause a shift in Demand and Supply?
A) price B) taxes C) prices of substitutes D) number of consumers
_______Which of the following is NOT necessarily a characteristic of Capitalism? A) limited government B) private property C) skilled workers D) free markets
_______Which of the following is another name for "resources"? A) output B) goods C) services D) inputs E) none of the above
_______Which of the following constitutes the Economizing Problem? A) scarce resources B) limited wants C) unlimited wants D) both A&B E) both A&C
Change in Supply
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones 0
S1 S 2 S3
Increase in Supply Decrease in
_______Which of the following is the negotiation between demand & supply in free markets? A) equilibrium B) division of labor C) price mechanism D) none of the above
_______Which of the following would cause the demand for pizza to shift to the right? A) price of pizza is decreased B) price of coca cola is decreased C) both A& B D) neither A nor B
_______Which of the following would NOT cause supply to increase? A) demand decreasing
B) costs of production falling C) technology improving D) prices expected to fall
_______For a shortage to occur: A) price must be set above the equilibrium
B) price must be set below the equilibrium C) price must be set at the equilibrium
_______Which of the following would make demand for French Fries shift to the right? A) a decreased price of French Fries B) people getting sick and tired of French Fries
C) sales tax reduction on fast foods D) another Great Depression
_______Which of the following would cause an increase in supply? A) improved technology B) declining costs of production C) prices expected to fall D) all of these
_______Which of the following pairs could shift both Demand and Supply?
A) price & taxes B) price & costs C) taxes & expected prices D) taxes & costs
_______Which of the following may cause a shift in Demand?
A) changing tastes B) changing price C) lower costs of production D) all of the above
_______Which of the following is the agreement between demand & supply in free markets?
A) equilibrium B) division of labor C) price mechanism D) none of the above
Law of Demand………is the inverse relation between price and the quantity demanded
Law of Supply………..is the direct relation between the price and the quantity supplied
Price Mechanism……..is the negotiation between demand & supply that sets equilibrium in free markets
Market………..is a place where buyers & sellers meet, negotiate & exchange
Surplus……….is overproduction, due to the price being too high relative to the equilibrium price
Capitalism………is a system based on private property, free enterprise & competition
Specialization………...is another name for the "division of labor"
Adam Smith………….was the author of the Wealth of Nations
Shortage………..is underproduction, due to the price being set below the equilibrium price
In the market at left, what is the equilibrium price? 3$
What is the equilibrium quantity? 5 pails of water
If the price was set at 2$,
would it cause a surplus or a shortage? shortage
How large would the surplus (or shortage) be? 4 pails of water
Given the graph at left, write True or False next to each statement.
equilibrium price is 8$....false
equilibrium price is less than 8$....true
equilibrium quantity is 12,000 pizzas per month…false
equilibrium quantity is 30,000 pizzas per month….false
when the price is 8$, there is a shortage of pizzas….false
1) At left, what is the initial equilibrium price? 8 $ per pizza
2) What is the initial equilibrium output? 30,000 pizzas
3 & 4) List 2 specific reasons why the demand has shifted as shown:
taste for pizza increased & pizza-lovers’ incomes rose
5) As a result of this shift in demand,
