Econ: CH 7 Test Review Demand & Supply

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1 Econ: CH 7 Test Review Demand & Supply The Big Idea: 1. Scarcity is the basic economic problem that requires people to make choices about how to use limited resources 2. Buyers and sellers voluntarily interact in markets, and market prices are set by the interaction of demand and supply Why it Matters: In this chapter, read to learn about how the relationship between supply and demand sets the prices you pay for goods and services Chapter 7 Section 1 Learning Target: -in this section, you will learn about the law of demand and how it affects choices you make *The Market Place: -main idea: in a market economy, buyers and sellers set prices -in a market economy, consumers collectively have a great deal of influence on prices of all goods and services - The demand of a good or service creates supply. - A market represents the freely chosen actions between buyers and sellers. -in a market economy, individuals decide for themselves the answers to: - What? - How? - For Whom? -a market economy is based on the principle of voluntary exchange

2 - Supply and demand analysis is a model of how buyers and sellers operate in the marketplace. *The Law of Demand: -main idea: the law of demand states that as price goes up, quantity demanded goes down, and vice versa -the law of demand explains consumer reactions to changing prices in terms of the quantities demanded of a good or service -there is an inverse relationship or opposite relationship between quantity demanded and price?what happens to the demand for an item of the price goes down?

3 -several factors explain the inverse relation between price and quantity demanded, or how much people will buy of any item at a particular price -factors include: - Real income effect - Substitution effect -diminishing marginal utility: - Utility - Marginal utility - Law of diminishing marginal utility Section 1 Comprehension: 1. In the chart below, show how each cause listed influences the quantity demanded for a given product or service. Cause Increase in real income Effect on Quantity Demanded Decrease in real income Price of substitutes Utility 2. Think about what you have learned about diminishing marginal utility. Then think of three examples from your own experience, and explain how they demonstrate this concept.

4 3. Describe the difference between the real income effect and the substitution effect. Chapter 7 Section 2 Learning Target: -in this section, students will learn more about the relationship between price and demand *Graphing the Demand Curve: -main idea: a demand curve is a graph that shows the relationship between the price of an item and the quantity demanded -economists can show the relationship between a change in quantity demanded and a change in demand using a demand curve

5 ?According to the demand curve, how many DVDs will be demanded at a price of $12 each? - A demand schedule is a table reflecting quantities demanded at different possible prices.

6 -a demand curve shows the quantity demanded of a good or service at each possible price. Demand curves slope downward, clearly showing the inverse relationship. *Determinants of Demand: -main idea: a change in the demand for a particular item shifts the entire demand curve to the left or right -factors that can affect demand for a specific product or service: - Changes in population - Changes in income - Changes in people's tastes and preferences?what happens to the demand curve when demand is affected by changes in population?

7 ?What happens to the demand curve when demand is affected by changes in income?

8 ?How can a change in preferences affect the demand curve? - The availability and prices of substitutes - The price of complementary goods -the decrease in the price of one good will increase the demand for its complementary

9 ?How is the demand curve affected by a change in the price of a substitute?

10 ?How is the demand curve affected by a change in the price of a complement? *The Price Elasticity of Demand: -main idea: elasticity of demand measures how much the quantity demanded changes when price goes up or down -for some goods, a rise or fall in price greatly affects the amount people are willing to buy. This economic concept is referred to as elasticity - The measure of how much consumers respond to a given change in price is referred to as price elasticity of demand.

11 ?Which graph would be affected by the price of of substitutes?

12 ?Why might a luxury item have elastic demand??how can you recognize goods with elastic demand? Goods with inelastic demand?

13 -luxury items, vacations, high-end electronics, even coffee are examples of elastic goods/services and have a very elastic demand - Staple food, medicine, spices have an in elastic demand. A price change has little impact on the quantity demanded by consumers.?what determines whether goods have elastic or inelastic demand?

14 -three factors determine the price elasticity of demand for an item: - The existence of substitutes - the percentage of a person's total budget devoted to the purchase of that good. - The time consumers are given to adjust to a change in price?why is the consumer demand for pepper relatively inelastic?

15 Section 2 Comprehension: 1. What does a demand curve show? 2. Create a diagram to show the determinants of demand. 3. If the price of Coca-Cola suddenly rose, what would happen to the demand for Pepsi? Why? 4. Explain the difference between demand and quantity demanded.

16 Chapter 7 Section 3 Learning Target: -in this section, students will learn more about the relationship between price and supply *Profits and the Law of Supply: -main idea: the law of supply states that as price goes up, quantity supplied goes up, and vice versa -to understand pricing, you must look at both demand and supply - The law of supply states that as the price of a good rises, the quantity supplied also rises. As the price falls, the quantity supplied also falls. -the higher the price of a good, the greater the incentive is for a producer to produce more

17 ?What happens to quantity supplied when price goes down? *The Supply Curve: -main idea: a supply curve is a graph that shows the relationship between price and quantity supplied -the law of supply can also be shown visually using a supply schedule and a supply curve

18 ?According to the supply curve, how many DVDs will be supplied at a price of $14 each? - A supply schedule is a table showing quantities supplied at different possible prices.

19 -the supply curve is an upward-sloping line that shows in graph form the quantities producers are willing to supply at each possible price *The Determinants of Supply: -main idea: a change in the supply of a particular item shifts the entire supply curve to the left or right -many factors affect the supply of a specific product. Four of the major determinants are (4): - The price of inputs - The number of firms in the industry - Taxes imposed or not imposed?if inputs become cheaper, what will happen to the supply curve?

20 ?If the number of firms increases, what will happen to the supply curve??if taxes are increased, what will happen to the supply curve?

21 - Technology -any improvement in technology will increase supply?how will an improvement in technology affect the supply curve? *The Law of Diminishing Returns: -main idea: when a business wants to expand, it has to consider how much expansion will really help the business - Will product output continue to increase proportionally as more workers are hired? -the law of diminishing returns shows that as more units of a factor of production are added to the other factors of production, after a certain point, the extra output for each additional unit hired will begin to decrease

22 ?Which graph would be affected by a significant improvement in technology?

23 ?If you start with 12 workers and hire 6 more, by how many units will your additional output decrease? Section 3 Comprehension: 1. Create a diagram to list the four determinants of supply. 2. How does the incentive of greater profits affect supply?

24 Chapter 7 Section 4 Learning Target: -in this section, students will learn about how supply and demand interact to affect prices and about restrictions the government sometimes places on this process *Equilibrium Price: -main idea: in free markets, prices are determined by the interaction of supply and demand -demand and supply operate together. As the price of a good goes down, the quantity demanded rises and the quantity supplied falls (or vice versa) - The point at which the quantity demanded and quantity supplied meet is called the equilibrium price.

25 ?According to the schedule and the graph, what is the equilibrium price and quantity demanded in this example?

26 ?What might happen if scientists proved that watching movies decreases life span? *Price as Signals: -main idea: under a free-enterprise system, prices function as signals that communicate information and coordinate the activities of producers and consumers - Raising prices signal producers to produce more and consumers to purchase less. -falling prices signal producers to produce less and consumers to purchase more

27 - A shortage occurs when at the current price, the quantity demanded is greater than the quantity supplied. -prices above the equilibrium price reflect a surplus to suppliers -when a market economy operates without restriction, it eliminates shortages and surpluses - When a shortage occurs, the price goes up to eliminate the shortage. - When surpluses occur, the price falls to eliminate the surplus. *Price Controls: -main idea: under certain circumstances, the government sometimes sets a limit on how high or low a price of a good or service can go - The government sometimes gets involved in setting prices if it believes such measures are needed to protect consumers and suppliers. - A price ceiling is a government - set maximum price that may be charged for a particular good or service. -effective price ceilings, and resulting shortages, often lead to nonmarket ways of distributing goods and services such as rationing and leading to the black market

28 ?What is the surplus of workers when the hourly wage price floor is $5.15? - Conversely, a price floor, is a government - set minimum price that can be charged for goods and services.

29 Section 4 Comprehension: 1. How does a shortage of tickets to a professional sports event determine the price of those tickets? 2. How are equilibrium prices determined? 3. Look at the charts in Figure 7.13 on page 198. What would happen to the equilibrium price on apartment rentals if the price ceiling was raised to $700?

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