MICRO TEST 1: Economics. Economizing Problem. Resources (Inputs) Capitalism. Market. Law of Demand. Law of Supply. Equilibrium.

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1 MICRO TEST 1: Economics Economizing Problem Resources (Inputs) Capitalism Market Law of Demand Law of Equilibrium Price Mechanism Surplus Shortage Change in Quantity Demanded Change in Demand Change in Quantity Supplied Change in

2 $ Demand Curve P ric e Q u a n tity $ 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 s Consumers like low prices. $ Curve Price Quantity $ s Curves are positively sloped because of the Law of 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. and Demand Together Demand Schedule Price Quantity $ Schedule Price Quantity $ $ Equilibrium of and Demand Equilibrium At $2., the quantity demanded is equal to the quantity supplied! Demand s 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.

3 $ SURPLUS Surplus Surplus -When the price is above the equilibrium price, the quantity supplied exceeds the quantity demanded. There is a surplus. -Suppliers will lower the price to increase sales, thereby moving toward equilibrium Demand s 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 -When the price is below the equilibrium price, the quantity demanded exceeds the quantity supplied. There is a shortage. $2. $1.5 Shortage Demand - Suppliers will raise the price because too many buyers are chasing too few goods, thereby moving toward equilibrium s 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: Ice- Cream Changes in Demand Increase in demand Decrease in demand D 1 s D 3 D 2 Notice that a Change in Demand is a shift of the demand curve, either to the left or right.

4 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 C $3. A rise in the price of ice cream cones results in a movement along the supply curve. 1. A S Decrease in S 3 Increase in S 1 S s s Notice that a Change in 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? 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

5 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? 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..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

6 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$...true equilibrium quantity is 12, pizzas per month false equilibrium quantity is 3, pizzas per month.false when the price is 8$, 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? 3, 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

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