Outlining the Chapter

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1 Outlining the Look over the chapter for an overview of the material. Pay attention to the main topics in the book. As you look over each section of the book, fill in the missing words in the outline below. I. The Market: Supply and Demand Together A. An auction: supply and at work 1. Supply and demand work together like an auction to determine price. 2. A market is in when the quantity demanded of a good equals the quantity supplied. B. Moving to equilibrium: what happens to price when there is a surplus or a shortage? 1. Prices when there is a surplus. a. With a surplus, suppliers will have inventories the level they normally hold. b. Some sellers will prices to reduce inventories; some suppliers will cut back on producing output; others will do a little of both. c. Price and output tend to fall until is reached. 2. Prices when there is a shortage. a. With a shortage, buyers will not be able to buy all they had hoped to buy. b. Some buyers will offer to pay a price to get sellers to sell to them instead of to other buyers. c. The higher prices lead suppliers to start producing output. So price and output rise until is reached. C. Changes in equilibrium price 1. Demand changes and equilibrium price changes a. Demand increases (and supply stays the same) 1) Demand increases cause the demand curve to shift to the. (recall the factors that can shift the demand curve for a good: income, preferences, prices of related goods, number of buyers) 2) Initially, quantity demanded is than quantity supplied so a shortage exists. 3) Price begins to until the market is in equilibrium again. Study Guide 48 NTC/Contemporary Publishing Group, Inc.

2 4) Conclusion: An increase in the demand for a good will increase price, all other things remaining the same. b. Demand decreases (and supply stays the same): 1) Demand decreases cause the demand curve to shift to the. (Recall the factors that can shift the demand curve for a good: income, preferences, prices of related goods, and the number of buyers.) 2) Initially, quantity demanded is than quantity supplied so a surplus exists. 3) Price begins to until the market is in again. 4) Conclusion: A decrease in the demand for a good will reduce price, all other things remaining the same. 2. Supply changes and equilibrium price changes a. Supply increases (and demand stays the same): 1) Supply increases causes a shift in the supply curve. (Recall the factors that can shift the supply curve for a good: resource prices, technology, taxes, subsidies, quotas, and the number of sellers.) 2) Initially, quantity supplied is than quantity demanded, so a surplus exists. 3) Price begins to until a new is reached. 4) Conclusion: An increase in the supply of a good will decrease price, all other things remaining the same. b. Supply decreases (and demand stays the same): 1) Supply decreases causes a shift in the supply curve. (Recall the factors that can shift the supply curve for a good: resource prices, technology, taxes, subsidies, quotas, and the number of sellers.) 2) Initially, quantity supplied is than quantity demanded, so a shortage exists. 3) Price begins to until a new equilibrium is reached. 4) Conclusion: A decrease in the supply of a good will increase price, all other things remaining the same. 3. Changes in supply and in demand at the same time a. Demand increases and supply increases 1) A demand increase and supply increase means that both the supply and demand curves shift to the right. Study Guide 49 NTC/Contemporary Publishing Group, Inc.

3 2) Equilibrium market quantity will. 3) Equilibrium price when demand increases more than supply increases. 4) Equilibrium price when supply increases more than demand increases. ) Equilibrium price remains constant when demand increases the same amount as supply increases. b. Demand decreases and supply decreases 1) Equilibrium price when demand decreases more than supply decreases. 2) Equilibrium price when supply decreases more than demand decreases. 3) Equilibrium price remains the same when demand decreases the same amount as supply decreases. 4. Does it matter if price is at its equilibrium level or not? a. When all markets are at equilibrium, there are no or of any good or service. b. When market prices are below equilibrium price, occur. c. When market prices are above equilibrium price, occur. Study Guide 0 NTC/Contemporary Publishing Group, Inc.

4 Building Vocabulary Fill in the blank spaces with the correct terms from the following list of economic concepts. surplus shortage equilibrium equilibrium quantity equilibrium price inventory rationing device 1. in a market exists when the quantity of a good that buyers are willing and able to buy is equal to the quantity of the good that sellers are willing and able to produce and offer for sale (that is, quantity demanded equals quantity supplied). 2. The condition in which quantity supplied is greater than quantity demanded is called a. 3. The stock of goods that a business or store has on hand is its. 4. A is a means for deciding who gets what of available resources and goods.. The is the amount of a good that is bought and sold in a market that is in equilibrium. 6. In a market in equilibrium the good is bought and sold at the. 7. The condition in which quantity demanded is greater than quantity supplied is referred to as a. Study Guide 1 NTC/Contemporary Publishing Group, Inc.

5 AS YOU STUDY Illustrating Economic Skills Think about the market for renting jet skis at a summer lake resort town. The graph on the next page shows an initial demand and supply curve for renting jet skis. For each case described, draw the new supply or demand curve and explain how the equilibrium market price will change. The first one is completed for you. 1. The town is hit with extremely cold and rainy weather. 2. The peak summer months bring large numbers of vacationers to the town. 3. More firms that rent jet skis open up business in the town. 4. The price of renting motor boats (a substitute for jet skis) decreases.. The price of jet ski fuel (a complement to using jet skis) increases. 6. The town places a tax on riding jet skis. Study Guide 2 NTC/Contemporary Publishing Group, Inc.

6 Price S P P 1 D 1 D Q Study Guide 3 NTC/Contemporary Publishing Group, Inc.

7 Using Economic Concepts Directions: Answer the following questions by looking at the graph below. 1. Find the equilibrium price in this market. 2. Find the equilibrium quantity in this market. 3. At a price of $0, find the quantity supplied, quantity demanded, and surplus or shortage. 4. At a price of $10 find the quantity supplied, the quantity demanded, and the surplus or shortage.. Suppose that demand increased in the graph. At a price of $10, would the shortage or surplus in your answer in question 4 increase or decrease? Price S $0 $30 $10 D Quantity Study Guide 4 NTC/Contemporary Publishing Group, Inc.

8 AS YOU REVIEW Practicing for the Test True or False: In each blank place a T if the statement is true or an F if the statement is false. 1. The demand for seeing movies increases and the supply of movies is constant. Then we would expect that the price of a movie ticket will decrease. 2. There is a shortage is 40 units of prom tickets and quantity demanded is 22 units. The quantity supplied must equal The supply of some good increases by more than its demand increases. This would cause the equilibrium price to rise. 4. The demand for a good increases while the supply for the good decreases. Then the price of the good will increase.. The demand for a good increases more than the supply of the good increases. Then the price of the good will increase. 6. A shortage exists when quantity supplied is greater than quantity demanded. 7. Market equity is when quantity demanded is equal to quantity supplied. 8. Suppose candy bars sell for $ a bar in Miami and for $2 a bar in Tulsa. Supplies of candy bars will move from Tulsa to Miami. 9. In a shortage, buyers will not be able to buy all they had hoped to buy. So some buyers will pay a lower price and hope that some supplier sells them the good. 10. All markets are always in equilibrium at all points in time. Study Guide NTC/Contemporary Publishing Group, Inc.