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Economics
Economizing Problem
Resources (Inputs)
Capitalism
Market
Law of Demand
Law of Supply
Equilibrium
Price Mechanism
Surplus
Shortage
Change in Demand
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
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.
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.
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.
_______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
_______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 pairs could shift both Demand and Supply?
A) price & taxes B) price & costs C) taxes & expected prices D) taxes & costs
_______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
Shortage……………..is underproduction, due to the price being set below the equilibrium price
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.
3 & 4) List 2 specific reasons why the demand has shifted as shown: