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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

Change in Supply
Demand Curves are negatively sloped because of the Law of
Demand Curve Demand which states there is a negative (or inverse) relation
Price of
Ice-Cream between price and the quantity demanded.
Cone
P r ic e Q u a n t it y
$3.00
$ 0 .0 0 12
2.50
0 .5 0 10 This means that lower prices enable and encourage consumers
1 .0 0 8

2.00
1 .5 0 6 to purchase more goods.
2 .0 0 4
2 .5 0 2 But higher prices disable and discourage consumers from
1.50
3 .0 0 0
purchasing goods.
1.00

0.50
Consumers like low prices.
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones

Supply Curves are positively sloped because of the Law of


Supply Curve Supply which states there is a positive (or direct) relation
Price of
Ice-Cream between price and the quantity supplied.
Cone
$3.00 Price Quantity
2.50
$0.00 0 This means that higher prices enable and encourage producers
0.50 0
2.00 1.00 1 to provide more goods.
1.50 2 But lower prices disable and discourage producers from
1.50 2.00 3
2.50 4 providing goods.
1.00
3.00 5
0.50
Producers like high prices.
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones

Supply and Demand Together Equilibrium of


Demand Schedule Supply Schedule
Price of Supply and Demand
Ice-Cream
Price Quantity Price Quantity Cone
Supply
$0.00 19 $0.00 0 $3.00
0.50 16 0.50 0
2.50 Equilibrium
1.00 13 1.00 1
1.50 10 1.50 4 2.00
2.00 7 2.00 7
2.50 4 2.50 10 1.50

3.00 1 3.00 13 1.00

0.50 Demand
At $2.00, the quantity demanded is Quantity of
equal to the quantity supplied! 0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones

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 that will be exchanged.
SURPLUS
Price of Surplus
Ice-Cream
Cone
Supply
$3.00 Surplus -When the price is above the equilibrium price,
the quantity supplied exceeds the quantity
2.50
demanded. There is a surplus.
2.00 -Suppliers will lower the price to increase sales,
thereby moving toward equilibrium.
1.50

1.00

0.50 Demand
Quantity of
0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream
Cones

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
Shortage
Price of
Ice-Cream
Cone -When the price is below the equilibrium price,
Supply the quantity demanded exceeds the quantity
supplied. There is a shortage.
$2.00
$1.50
- Suppliers will raise the price because too
Shortage Demand many buyers are chasing too few goods, thereby
moving toward equilibrium.

0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of
Ice-Cream Cones

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
Price of Ice-
Cream Cone

Increase in
demand

Decrease in
demand

D2
D1
D3
0 Quantity of
Ice-Cream
Cones

Notice that a Change in Demand is a shift of the demand curve, either to the left or right.
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 Change in Supply


Price of Price of S3
Ice-Cream
Cone
S Ice-Cream
Cone
S1 S2
C
$3.00 A rise in the price of Decrease in
ice cream cones Supply
results in a movement
along the supply
curve. Increase in
Supply
A
1.00

Quantity of Quantity of
0 1 5 Ice-Cream 0 Ice-Cream
Cones Cones

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
_______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

Equilibrium………….is the point of agreement between demand & supply in markets


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,


what has happened to the equilibrium price of pizza? price increased