1. Chapter 3
Supply and Demand
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2. Questions ALL Economic Systems must answer:
What will be produced?
How will it be produced?
For whom will it be produced?
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3. Allocation Systems
An allocation system determines who gets goods and services and who doesn’t.
4 possible allocation systems:
Government decides (communism)
First-come, first-serve: whoever gets there first, gets the goods and services (Emergency rooms).
Lottery system: lucky winner gets the goods & services
Market (price system)-those with the income to purchase a good or service get it.
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4. Allocation Systems cont.
Are these systems fair?
If they are not fair, how do we decide which system to use?
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5. Money or Exchange Barter System:
Why is money an easier medium of exchange?
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6. The Law of Demand
The law of demand holds that other things equal, as the price of a good or service rises, _________________________.
The reverse is also true: as the price of a good or service falls, its quantity demanded increases.
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7. Demand Curve
The demand curve has a negative slope, consistent with the law of demand.
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8. The Law of Supply
The law of supply holds that other things equal, as the price of a good rises, _______________________________________________________.
Why do producers produce more output when prices rise?
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9. Supply Curve
The supply curve has a positive slope, consistent with the law of supply.
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10. Equilibrium In economics, an equilibrium is a situation in which:
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11. Equilibrium
Equilibrium occurs at a price of $3 and a quantity of 30 units.
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12. Shortages and Surpluses
A shortage occurs when…….
A shortage implies the market price is ___________.
A surplus occurs when….
A surplus implies the market price is __________.
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13. Shift in the Demand Curve
A change in any variable other than price that influences quantity demanded produces a shift in the demand curve or a change in demand.
Factors that shift the demand curve include:
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14. Shift in the Demand Curve
This demand curve has shifted to the right. Quantity demanded is now higher at any given price.
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15. Equilibrium After a Demand Shift
The shift in the demand curve moves the market equilibrium from point A to point B, resulting in a higher price and higher quantity.
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16. Shift in the Supply Curve
A change in any variable other than price that influences quantity supplied produces a shift in the supply curve or a change in supply.
Factors that shift the supply curve include:
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17. Shift in the Supply Curve
For an given rental price, quantity supplied is now lower than before.
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18. Equilibrium After a Supply Shift
The shift in the supply curve moves the market equilibrium from point A to point B, resulting in a higher price and lower quantity.
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19. Price Ceilings & Floors
A price ceiling is a…
Results in a shortage of a product
Common examples include apartment rentals and credit cards interest rates.
A price floor is a...
Results in a surplus of a product
Common examples include soybeans, milk, minimum wage
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20. Price Ceiling
A price ceiling is set at $2 resulting in a shortage of 20 units.
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21. Price Floor
A price floor is set at $4 resulting in a surplus of 20 units.
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