Unit 4 Vocabulary

Circular Flow- ____________________________________________________________________________

Factor/Resource Market-___________________________________________________________________

Product Market-__________________________________________________________________________

Households/Individuals - ___________________________________________________________________

Firms/Businesses-_________________________________________________________________________
 Unit 4 Vocabulary (continued) Page 2
Interdependence- ________________________________________________________________________

Entrepreneurs-___________________________________________________________________________

Incentives-_______________________________________________________________________________

Consumers/Buyers - _______________________________________________________________________

Producers/Sellers-_________________________________________________________________________

Profit- __________________________________________________________________________________

Law of Demand-___________________________________________________________________________

Quantity Demanded vs. Demand -____________________________________________________________

____________________________________________________________________________

Demand Shifters / Determinants -____________________________________________________________

____________________________________________________________________________

Elasticity of Demand - ______________________________________________________________________

Elastic/Inelastic goods -_____________________________________________________________________

Law of Supply - ___________________________________________________________________________

Quantity Supplied vs. Supply -_______________________________________________________________

____________________________________________________________________________

Supply Shifters / Determinants - ______________________________________________________________

Markets and Prices -_______________________________________________________________________

Equilibrium Price/Market Clearing Price/Market Price - ___________________________________________

Price Ceilings and Floors -___________________________________________________________________

Surpluses/Shortages -______________________________________________________________________
 Page 3
Circular Flow Model

1.
 Page 4
2

3. What do households provide to the

resource market?
4.
A. Land, Labor, Capital

B. Money and Goods

C. People and Goods

D. Taxes, Goods, and People

5.
 Unit 4 - Supply and Demand Page 5
Demand is the __________________________________________________________
What is “ Demand”?
An individual demand curve illustrates how the quantity that a
person will demand varies depending on the
__________________________________________.

When the supply data is graphed, it forms a supply curve with

a ________________________

Economists analyze demand by

listing prices and desired quantities
in a demand schedule (chart).

What is the Law of Demand? The Law of Demand states that the ________________________ of a good or service varies
___________ with its _______.

When _______ goes _____, the ______ demanded goes ______, when _______goes _____,
the _______demanded goes ______.
(Practice Graphing Using
Appendix B)
A market demand curve illustrates how the quantity that all
interested persons (the market) will demand varies depending
on the price of a good or service.

Marginal utility is the ______________________________________ a person receives from

What is relationship between getting or using one more unit of a product.
demand and marginal utility? The principle of “diminishing marginal utility” states that the __________________________

____________________________________________________________________________

A change in demand is when people buy different amounts of the product at the same prices.
What can affect change in 1. 2. 3.
demand?
4. 5. 6.

The change in quantity demanded shows a change in the amount of a product purchased
What is change in quantity when there is a ___________________________________.
demanded?
Page 6
 Unit 4 - Supply and Demand Page 7

Practice: Demand vs. Quantity Demanded

What happens to the demand for coffee if_____? Label each as increase in demand or decrease in demand and its
determinant, or label based on increase/decrease “quantity” demanded (based on price).
1. People start to going to Starbucks in big numbers. ___________________________________
2. The prices of coffee mugs, sugar, and creamer increase. How would this affect demand for coffee?_____________
3. The price of Starbucks coffee increases by 50 cents a cup. ________________________________________
4. Excitement is created by a new local Starbucks in a retail shopping mall. _______________________
5. A civil war is expected to break out next week in Brazil, which will lead to increased coffee prices. ____________

What is meant by demand elasticity? Elasticity measures _____________________________________________________

Demand is “elastic” when a change in price ___________________________________

You often spend _______________money in the end.

***Usually an _______________***

When is a demand inelastic? Demand is “inelastic” when _______________________________________________.

You often spend ____________money in the end.

***Usually a ________________***

Examples: ___________________________________

What are the determinants of demand Demand is elastic if the answers to the following questions are “yes”.
elasticity?
•Can the purchased be _________________________________? However, some pur-
chases cannot be delayed, regardless of price changes.

•Are adequate __________________________________? Price changes can cause

consumers to substitute one product for a similar product.

•Does the purchase use a _________________________________? Demand elasticity

can increase when a product commands a large portion of a consumer’s income.
 Page 8

What is the illustrator trying to communicate What is the illustrator trying to communicate this cartoon?
this cartoon? Explain and support your answer Explain and support your answer in a minimum of three sen-
in a minimum of three sentences. tences.

If you were an illustrator, what example would you use to illustrate elastic demand? Answer in a minimum of three sentences..

If you were an illustrator, what example would you use to illustrate inelastic demand? Answer in a minimum of three sentences..
 Page 9
Unit 4 - Supply and Demand
What is supply? The Law of Supply states that suppliers will normally offer
more for a sale at high prices and less at lower prices.

Supply is the amount of a product that would be offered

for sale at _____________________ ________________

An __________________________ illustrates how the

quantity that a producer will make varies depending on
the price that will prevail in the market.

A __________________________supplied illustrates the

amount offered for supply at a given price (i.e. it is a point
on the line).

When the supply data is graphed, it forms a supply curve

with an ________________________

What is a change is quantity The change in the amount offered for sale __________________________________________
supplied? Producers have the freedom, if prices fall too low, to slow or stop production or leave the
market completely. ____________________________________________________________
Example: Suzuki automobiles

What determinants/factors can A change in supply is when suppliers offer different amounts of products for sale at all possible
cause a change in supply prices in the market.
(shifters)? 1. 5.

2. 6.

3. 7.

4. 8.

Supply versus Quantity Supplied Supply: change in the amount offered for sale at all prices
 A change in supply is seen as________________

P ___________________________________________

The ___________________________ move the line.

 Increase in supply = line shifts Right
 Decrease in supply = line shifts left

Change in quantity supplied: change in amount for sale in

response to change in price.
A change in quantity supplied ______________
_____________________________________ line.
 THE ONLY THING THAT CAUSES CHANGE HERE IS

Q PRICE!!!!
 Unit 4 - Supply and Demand Page 10
Practice
The price of crude oil A severe drought damages
increases 50%. over 60% of the nation’s
Will this cause a change in wheat crop.
S or QS?_______ Will this cause a change in
Reason? S or QS?_______
________________ Reason?________________

A school district has just

announced that because of
budget cuts they must de-
The producer of pizza is able to crease the salary of substi-
get tomatoes for half the regu- tute teachers from $90 per
lar price. What will be the im- day to $75 a day. What hap-
pact on pizza? Will this cause a pens to the number of peo-
change in S or QS?_______ ple willing to substitute
teach?
Reason?________________
Will this cause a change in S
or QS?_______

Reason?________________

If the average cost of labor

increases from $50/hr to
Currency traders decide
$60/hr in the auto industry,
that they no longer want to
what will be the impact on
hold US dollars. What will
the supply of cars? Will this
happen to the supply of
cause a change in S or QS?
USD?
_______
Will this cause a change in S
Reason?________________
or QS?_______

Reason?________________

What is elasticity of supply? A measure of how quantity supplied__________________________________________________________________

When is a supply elastic? Supply is elastic when supply is ________________________________ in price. Example: _______________________

When is a supply inelastic? Supply is inelastic when a small increase in price causes _________________________ in supply because these prod-
ucts are necessities in life. Example:___________________________________________________________________

What determines supply elasticity? The nature of the production. Can the ______________________________ be adjusted easily? Examples: __________
_________________________________________________________________________________________________.
 Page 11
What is price? the monetary _____________of a product as established by supply and demand.

What is the 1.Prices are ____________________because they do not fa-

advantages of vor the buyer OR the consumer. They are the result of
pricing? ___________________.
2.Prices are _________________, allowing for the
_______________ of unforeseen events and changes in the
market.
3.Prices have ______________________________________.
4.Prices are ________________________and easily _______________________.

What is meant by
allocation pricing? __________________________, or the system where the gov-
ernment decides everyone’s “fair” share, leads to the question of
____________________________.
Rationing leads to ___________________________________
Rationing leads to _________________________________.

What is meant by
Together, prices comprise a system that ______________________________________
pricing as a system?
_______________________________________, linking all markets in the economy.

What is the price Together, demand and supply make a _______________________________________.

adjustment process? Price adjustments help a competitive market reach _____________________________,
a situation in which prices are relatively stable and the ________________ of goods or
services __________________is equal to the __________________ _______________.

The _________________ ____________________ is the price at which supply meets

demand. The market is cleared. It is often called the ___________________________.
A _________________ occurs when supply exceeds demand.
A _______________________occurs when demand exceeds supply.
 Page 12

To find the equilibrium price and quantity, one tool that can be used is
a supply and demand schedule as seen on the right.

When a market is at equilibrium_______________________________

_________________________________________________________

Using the schedule on the right, how many slices are sold at
equilibrium? ______________

Practice
Using the schedule on the left, at what price point is equilibrium
reached?___________
 Page 13

Practice
At what price and what quantity is equilibrium seen on the graph to the right?

Price?__________ Quantity?____________

This graph shows that there is no _______________ and no ___________________.

If the market price or quantity supplied is anywhere but at equilibrium, the market is said to be at ___________________________

Disequilibrium can produce two possible outcomes:

•Shortage—A shortage causes _________________________________________________________________________________

•Surplus—A surplus causes ____________________________________________________________________________________

Practice
How much is the shortage when pizza is sold at $2.00 per slice?_____________________

How much is the surplus when pizza is sold at $4.00 per slice?_____________________
 Explaining and Predicting Prices Page 14
A ____________________________________ is normally the result of a change in supply, a change in demand, or both.

Even small changes in an elastic supply can _________________________________________________________________

Elastic supply and demand ________________________________________________________________________________

The Competitive Price Theory

•The theory of ____________________________________________represents a set of ideal

_____________________________: serves as a model to measure market performance.

In theory, a competitive market allocates resources ________________________.

To be competitive, sellers are forced to lower prices, which makes them find ways to keep their
costs down.

Competition among buyers keeps prices from ______________________.

•Price Ceiling – ___________________________________________________________________________________

•Policy makers set ceiling price ______________________ the market equilibrium price which they believed is _____________

•Intention of price ceiling is __________________________________________________________________

•Price ceiling generates ________________________ on the market

•Ex. _________________________________ – “Can’t go above the ceiling”

Price Floor – ___________________________________________________________________________

-Other prices are considered ________________ and so steps are taken to

___________________________.

-The _____________________________, the lowest legal wage that can be paid to most
workers, is a case in point.

-Minimum wage is a price floor, or lowest legal price that can be paid for a good or service.

-Price floor generate ___________________________on the market

•Ex.____________________________ – “Can’t go below the floor”

Agricultural Price Supports

•The US Federal Government has long been in the business of providing agricultural price supports.

•Farmers receive ________________________ to offset market forces.

•These subsidies allow US farmers to _______________________ the unpredictability of things such as the
________________that affect supply.

•They also keep US farmers ______________________________________

 Appendix A

Using the diagram above, what is happening at each or the numbered stages in the flow of either money
or goods and services?
1.______________________________________________________________________________________

2.______________________________________________________________________________________

3.______________________________________________________________________________________

4._______________________________________________________________________________________

5._______________________________________________________________________________________

6._______________________________________________________________________________________

7._____________________________________________________________________________________

8.______________________________________________________________________________________

Flow of Goods and Services to Sellers Spending

Finished Resources Revenue
Flow of Goods and Services to Buyers Income
Resources focusing on Factors of Production
Cost
Appendix B1
Appendix B2
Demand Schedules Appendix C1
Price of Two-liter Quantity
Bottles of Soda Demanded

$1.50

$1.25

$1.00

$0.75

$0.50

$0.25

Price of New Pair Quantity

of Special Edition- Demanded

$240

$200

$160

$120

$80

$40

Price of Shirt Quantity

from Forever 21 Demanded

$60

$50

$40

$30

$20

$10
 Appendix C2
P Two-liter Soda Bottle
$1.50

$1.25

$1.00

$0.75

$0.50

$0.25

0 Q
2 4 6 8 10 12 14 16 18 20

P New Pair of Special Edition Nike Shoes

240

200

160

120

80

40

Q
0 1 2 3 4 5 6 7

P Shirt from Forever 21

60

50

40

30

20

10

Q
0 2 4 6 8 10 12 14 16 18 20
Appendix D1
Appendix D2
 Appendix E1
Economic Demand Worksheet

Law of Demand: In your own words, what is the law of demand?

Give two examples of how you have observed the law of demand at work, school, or in the “real world.”

A.

B.

How does the Law of Demand related to the demand curve?

Changes in Demand:

Using your notes for background information. what variables influence a demand for a normal good?

Why does a reduction in the price of a normal good not increase the demand for that good? Explain your answer.

Substitution and Compliments:

What is the difference between the substitution and compliments.

Demand: Appendix E2
Explain the effect of an increase in consumer income on demand for a good.

Shifting Demand:

Using demand curves, show the effect of each of the following events on the market for cigarettes.

 A cure for lung cancer is found.

 The price of cigars increases.

 Wages increase substantially in states that grow tobacco.

 A fertilizer that increases the yield per acre of tobacco is discovered.

 There is a substantial increase in the price of matches and lighter fluid.

 More states pass laws restricting smoking in public places.

P P P

Q Q Q
Wages increase substantially in
A cure for lung cancer is found. The price of cigars increases.
states that grow tobacco with resi-
dents who heavily smoke.

P P P

Q Q Q
A fertilizer that increases the yield There is a substantial increase in the More states pass laws restricting
per acre of tobacco is discovered. price of matches and lighter fluid. smoking in public places.
Appendix F1
Appendix F2
1. What do most people take for granted? (0:15) Appendix G
2. The key to markets is voluntary exchange. What is that? (0:57)

3. According to voluntary exchange, if a lifeguard takes a job paying $12.00 per hour, what must be true? (1:28 / 1:36)

4. Markets are very good at allocating scarce resources toward what? (1:59)

5. Markets generate information that guides buyers and sellers toward what they should be buying or selling. (2:21)

6. How do markets encourage suppliers to provide high-quality goods? (2:33)

7. There are two conditions that make it hard for businesses to take advantage of people. Record at least one of these conditions.
(2:50)

8. Every dollar spent signals two things to producers. What are they? (3:06)

9. If there’s only one thing you should learn in economics, what would it be? (3:25)

10. What is the law of demand? (3:50)

11. How do demand and supply curves slope? (4:11)

12. If the price of an item is high, there is likely to be what economic condition? (4:17)

13. If the price of an item is low, there is likely to be what economic condition? (4:26)

14. What is an equilibrium price? (4:35)

15. What store was discussed as being a place where price has nothing to do with realistic economics? (4:56)

16. Something like a change in weather will typically shift which of the curves on a crop’s supply and demand graph? (5:29)

17. What four things can happen in a market to change the price of a good? (5:44)

18. Suppose the price of oranges falls, so the government pays money to orange farmers to help them out. What would be the
usual view of an economist regarding the government’s decision (6:28)

19. What product was mentioned as example of a good with a lot of price volatility -- the price changes all the time? (6:48)

20. If the supply and demand curves both move due to market conditions, what will move with them? (7:13)

21. What two examples were given as goods for which the free-market approach has serious problems? (8:00)

22. If you could sell human hearts, what would a criminal be motivated to do? (8:15)

23. If you could solve some problems with a market approach, but a completely free market would cause other problems, then
what kind of market should be established? (8:36 / 9:03)

24. Why are the laws of supply and demand not absolute laws like the law of gravity? (9:32)
 Unit 4: Microeconomics Reading Appendix H1

The student will describe how households, businesses, and governments are interde-
pendent and interact through flows of goods, services, and money.

Illustrate by means of a circular flow diagram, the Product market; the Resource
(factor) market; the real flow of goods and services between and among businesses,
households, and government; and the flow of money.

Explain the role of money as a medium of exchange and how it facilitates exchange.

Money : Anything that is used to buy and sell goods and services. Money has three functions.
First, it is a medium of exchange, which means that it is generally accepted as payment for goods
and services. Second, it is a store of value; that is, it retains its value at least over periods of days
and months. Third, it is a unit of account, so that values are measured in units of money. In dif-
ferent times and places, many different items have served these three functions of money: gold,
silver, shells, cattle, tobacco and printed paper currency. Today individuals, businesses and gov-
ernments often use deposits in checking and similar accounts as money.

24. The student will explain how the Law of Demand, the Law of Supply, and prices work to deter-
mine production and distribution in a market economy.

24.a. Define the Law of Supply and the Law of Demand.

The Law of Supply states that producers will be motivated to sell more goods and services at
higher prices than at lower prices. In short hand, as price increases, the quantity supplied in-
creases. Therefore, there is a direct relationship between price and quantity supplied on the sup-
ply curve in a market. Students can remember that the supply curve is upward-sloping by re-
membering that supply has the word UP in it. (example: sUPply) On the sample supply curve be-
low, you can see how the quantity supplied increases as the price increases.
 Appendix H2

*Note that a change in price causes a change in QUANTITY SUPPLIED and causes a movement along the curve. Basical-
ly as the price changes in the market sellers want to sell more because they are incentivized by higher profit and as the
price falls they are encouraged to either sell less.

The Law of Demand states that consumers will be motivated to buy more goods and services at lower
prices than at higher prices. In short hand, as price increases, the quantity demanded decreases.
Therefore, there is an inverse relationship between price and quantity demanded on the demand
curve in a market. Students can remember that the demand curve is downward-sloping by remem-
bering that demand starts with the letter D for Downward-sloping. On the sam ple dem and
curve below, you can see how the quantity demanded decreases as the price increases.

*Note that a change in price causes a change in QUANTITY DEMANDED and causes a movement along the curve. As
the price increases in the market buyers want to buy less because they are trying to get a bigger bang for their buck and
as the price falls, they are encouraged to buy more because they feel like they are getting a fair deal.
24.c. Describe the role of buyers and sellers in determining market clear- Appendix H3
ing price.

The buyer’s demand curve in a market is determined by adding together all the quantities consumers
are willing and able to purchase at each price in the market.
The seller’s supply curve in a market is determined by adding together all the quantities producers
are willing and able to sell at each price in the market.
The market clearing or equilibrium price is found at the intersection of the market demand and sup-
ply curves. This is the point at which the quantity demanded by consumers is equal to the quantity

The price is the amount of money needed to buy a particular good or service. In a market, the price
and quantity exchanged are determined by the interaction of demand and supply. Changes in de-
mand or supply alter the equilibrium price as well as the quantity bought and sold at that price. Pric-
es provide incentives to both buyers and sellers. For example, if poor weather in Brazil causes a re-
duction in the supply of coffee and an increase in the price of coffee, then at least some buyers of cof-
fee will react to the higher price by reducing the amount of coffee they drink or by substituting some
other drink. If the demand for fresh fruits and vegetables increases, causing the price to rise, then at
least some suppliers will react to the higher price by producing more. In this way, flexible and adjust-
able prices are messengers in a market economy.

24.f. Identify the determinancts (shifters) of demand (changes in related goods

(substitutes/compliments), income, consumer expectations, consumer preferences/
tastes, and number of consumers) and illustrate the effects on a supply and demand
graph.

Changes in Demand: DEMAND r efer s to all of the pr ices a nd qu antities of con su m er s

in the market for a good. A change in the price of a good, service, or factor of production causes “a
movement along the demand curve” also known as a “change in quantity demanded”. The price
change causes a movement along the demand curve showing a different quantity consumers will pur-
chase at the new price. This is DIFFERENT from a change in demand which SHIFTS the entire
curve.
The graphs below show changes in demand. The first shows an increase in Appendix H4
demand while the 2nd shows a decrease. Increases always go to the right
while decreases always go to the left.

The factors which shift the entire demand curve are called determinants of demand. There are SIX
main determinants of demand.

1. Change in Consumer Income: W hen a lar ge nu m ber of consu m er s in the m ar ket fo r a

good experience a change in income, the entire demand curve in that market may shift. For example,
if the United States is experiencing a severe recession, a large number of consumers in the market for
automobiles will experience a decrease in income as companies reduce their work force. This will
cause the demand curve for automobiles to decrease, shifting it to the left. In contrast, if the United
States is experiencing a major period of economic growth, employers will have to compete with one
another for workers and wages of consumers will rise. Therefore, the demand for automobiles will
increase, shifting the demand to the right.

2. Change in Consumer Taste: W hen a lar ge nu m ber of consu m er s exper ience a change
in preference toward or away from a good, the demand for the good will change. For example, as
more information became available and marketing campaigns targeted the obesity problem in the
United States, more and more consumers began to reject high fat, high calorie foods. This change
caused a decrease in demand for many fast food items, shifting the demand for certain types of fast
food to the left.

3. Change in the Price of a Substitute Good: B ased o n the law o f dem and, w e k n o w that
when the price of a good rises, consumers will buy a smaller quantity of the good. However, when
there is a substitute available for the good with the higher price, the demand curve for the substitute
good will increase, shifting it to the right. For example, let’s assume that doughnuts and bagels are
substitutes. As the price of doughnuts rise, consumers buy a smaller quantity of doughnuts, but they
also buy more bagels at all prices, shifting the demand curve for bagels to the right.

4. Change in the Price of a Complementary Good: B ased on the law of dem and, w e
know that when the price of a good rises, consumers will buy a smaller quantity of the good. Many
goods have what economists call a complementary good. This is a good that is consumed with the
original good. For example, peanut butter and jelly are often consumed together so they are called
complementary goods. When the price of peanut butter rises, consumer respond by buying a smaller
quantity of peanut butter. Since jelly is a complementary good to peanut butter, consumer buy less
jelly at all prices, shifting the demand curve for jelly to the left.
 Appendix H5
5. Change in Consumer Price Expectations: So m etim es, consu m er s pr e-
dict that market prices for a good or service are going to change in the future. When consumers be-
lieve the price for a good will go lower in the future and they can delay their purchase until that time,
the demand for the good will decrease now, shifting the demand curve to the left. If they believe pric-
es will go up in the future, they will buy more of the good now before the price increase occurs, shift-
ing the demand curve to the right. For example, during the Great Recession of 2008-2009, house
prices in many markets around the United States fell drastically. The low prices would usually act as
a signal for consumers to purchase a larger quantity of the properties. However, because many econ-
omists predicted a large number of foreclosures were still on the way, the entire demand curve for
houses decreased because of the expectation that prices would fall even more in the months to come.
Consumers delayed their purchases because of an expected decrease in prices.

6. Change in Number of Consumers in the Market: The dem and for a par ticu lar go o d
may increase or decrease due to more or less people in the market for the good. For example, before
the advent of ecommerce (using the world wide web to buy and sell), most businesses sold products
to people who lived in their area of the country or who ordered products from their mail order cata-
logs. As people began to use online shopping in greater numbers, many businesses with little or no
web presence probably experienced a decline in consumers of their products due to increased com-
petition from online businesses while businesses who quickly and effectively adapted to the ecom-
merce model probably saw an increase in consumers of their products.

24.e. Identify the determinants (shifters) of supply (changes in costs of productive re-
sources/inputs, government regulations, number of sellers/producers, producer ex-
pectations, technology, and education of workers) and illustrate the effects o a supply
and demand graph.

Changes in Supply: SUPPLY r efer s to a ll of the pr ices and qu antities of seller s in the
market for a good. A change in the price of a good, service, or factor of production causes “a move-
ment along the supply curve” also known as a “change in quantity supplied”. The price change causes
a movement along the supply curve showing a different quantity sellers wish to sell at the new price.
This is DIFFERENT from a change in supply which SHIFTS the entire curve.

The graphs below show changes in supply. The first shows an increase in supply while the 2nd shows
a decrease. Increases always go to the right while decreases always go to the left.
 Appendix H6
The factors which shift the entire supply curve are called determinants of supply. There are FIVE
main determinants of supply.

1. Change in Cost of Factors of Production (Change in input prices): W hen pr o du cer s

make goods and services, they incur costs for producing those goods and services. The things they
must buy to make their products are called the factors of production or inputs. When input prices
rise, producers must spend more of their revenue to buy the inputs and therefore are forced reduce
their supply of the good due to the greater expense associated with the input. When input prices be-
come cheaper, then sellers can increase their supply because it is cheaper to produce their product.
For example, producers in the market for candy must have a way to sweeten their product, usually
sugar from sugar cane or corn syrup from corn. If the price of sugar rises, the producers of candy will
have to spend more to buy the sugar input and will supply less candy to the market.

2. Change in Profit Opportunities: Many pr odu cer s of goods and ser vices have facto -
ries or businesses that are somewhat flexible. When producers see that there is more profit to be
made from the production and/or sale of another good, they will increase the supply of that good
while reducing the supply of the original good. For example, at some point in the past, most produc-
ers of consumer electronics made VCRs for consumers who wanted to watch movies at home. At
some point, consumer taste began to shift in favor of DVD and/or Blue Ray players. Electronics pro-
ducers began to increase their supply of the DVD/Blue Ray players while decreasing the supply of
their VCRS.

3. Change in Producer Price Expectations: Som etim es, produ cer s pr edict tha t m ar ket
prices for a good or service are going to change in the future. When sellers believe the price for a
good will go lower in the future and they can increase their supply now, they will sell all they can be-
fore the price decreases, shifting the supply curve to the right. If they believe prices will go up in the
future and they can delay the sale of their goods, they will supply less of the good now and wait for
the price increase, shifting the supply curve to the left now. For example, if suppliers of gasoline ex-
pect prices to rise in the summer due to many people traveling by car for family vacations, they may
reduce their supply of gasoline to the market in the spring, waiting for the higher summer prices.
This would cause the supply curve for gasoline to shift to the left in the spring.

4. Change in Number of Sellers in the Market: The su pply of a par ticu lar good m ay in-
crease or decrease due to a change in the number of sellers in the market for the good. Using our
ecommerce model again, we can see how this would occur. Before the World Wide Web, someone in
a small town might only have access to one seller in the market for baseball equipment. With the
growth of ecommerce, the person in the small town can now choose to order baseball equipment
from a list of hundreds of sellers found through a brief search engine query and have it delivered to
their doorstep.

5. Change in Technology: Technological im pr ovem ents in the tools or pr ocesses u sed

to make goods and services increases the supply of those goods and services because the new tech-
nology eventually makes production cheaper. For example, imagine businesses before computers. All
records would have been handwritten or typed on a typewriter. Large numbers of filing cabinets
would have been needed to hold carbon copies of letters and records. Imagine the time, money, and
space saved by being able to make small edits to originals instead of retyping the whole thing and
storing your documents on a server or in the cloud instead of big filing cabinets in your office build-
ing.
 Appendix H7
24.g. Explain the difference between elastic and inelastic demand and its
responsiveness to change in price.

Price elasticity of demand refers to the responsiveness of consumers to changes in price.

Market demand is inelastic when the percentage change in the price of a good is greater than the
percentage change in quantity demanded of the good. For example, if a diabetic needs insulin in or-
der to live, they are likely to purchase just as much even if the price rises significantly.
Market demand is elastic when the percentage change in the price of a good is less than the percent-
age change in quantity demanded of the good. For example, if the price of snack you buy goes up,
you will likely buy a much smaller quantity because you immediately substitute another snack for it
since you have so many choices.

24.h. Explain and illustrate on a graph how prices set too high (price floors) create
surpluses, and prices set too high (price ceilings) create shortages.
The student will explain why governments sometimes view the equilibrium price in a market as too
high or too low. They will be able to explain that government price controls include price floors and
price ceilings. They will be able to graph government price controls and explain why they create
shortages and surpluses in markets.

Government price controls occu r w hen a local, state, or national gover nm ent decides
to set a legal maximum or legal minimum price in a market for a good or service.

Price Floors: A pr ice floor is a legal m inim u m pr ice for a good, ser vice, or facto r o f
production. Charging or paying a price below the price floor is illegal and can carry a penalty under
the law. The most familiar price floor is the minimum wage. In the United States, it is illegal to pay
workers less than $7.25 per hour. Price floors create a surplus in the market. The government’s argu-
ment for a minimum wage stems from a belief that the market wage is not high enough to provide a
reasonable standard of living for low skilled workers.

Surplus: A su r plu s occu r s w hen the qu antity su pplied of a good is gr eater than the
quantity demanded of the good. Price floors typically create a surplus because the government price
is set above the equilibrium price in the market and consumers do not want to pay a price higher
than what they think the good is worth.
 Appendix H8
Price Ceilings: A pr ice ceiling is a legal m axim um pr ice for a good, ser -
vice, or factor of production. Charging or paying a price above the price ceiling is illegal and can car-
ry a penalty under the law. The most familiar price ceiling is the rent control. In some cities, the
equilibrium rent is viewed as too high for lower income people. In order to ensure that some housing
is available to lower income people, the city designates some housing units as rent control units.
Owners of these units cannot legally rent the units at price higher than the price ceiling. Price ceil-
ings usually create shortages in the market.

Shortage: A shor tage occu r s w hen the qu antity su pplied of a good is less than the
quantity demanded of the good. Price ceilings typically create a shortage because the government
price is set below the equilibrium price in the market and sellers do not want to sell at a price lower
than what they think the good is worth.

Problems with price controls: Pr ice contr ols w ill often cr eate u nder gr ou nd m ar kets. If
the price floor minimum wage is truly too high for the market to bear, both workers and employers
will choose to trade in the underground market. This is bad for government because it will not collect
taxes on that income earned and it will have to spend resources to enforce the price floor. If the price
ceiling rent is truly too low for the market, tenants will cheat by illegally subletting their rent con-
trolled apartments to others, pocketing the difference. Landlords will have no incentive to keep
Unit 4 Reading Questions Appendix I1

1. What flows from the Factor market to businesses?

2. What flows from the Product market to households?

3. What flows from businesses to the product market?

4. What flows from the factor market to households?

5. What are the three functions of money?

6. Define the law of supply:

7. Define the law of demand:

8. A change in _________ causes a change in _________________________________ and causes a movement along the curve.

9. Where is equilibrium price found?

 Appendix I2
10. Changes in ______________ or ________________ alter the equilibrium price as well as the quantity
bought and sold at that price.

11. _______________________ causes a movement along the ________________________ showing a different quantity
_________________ will __________________ at the new price.

12. What are determinants of demand?

13. List the six determinates of demand:

A.

B.

C.

E.

F.

14. ________________________ causes a movement along the _______________________ showing a different quantity
_______________ wish to _____________ at the new price.

15. What are determinants of supply?

16. List the five determinates of supply:

17. This refers to the responsiveness of consumers to changes in price:

18. When is market demand inelastic? Appendix I3

19. When is market demand elastic?

20. When do government price controls occur?

21. What is the most familiar type of price floor?

22. When do surpluses occur?

23. _________________________________ is a legal maximum price for a good, service, or factor of production. Charging or pay-
ing a price above the price ceiling is illegal and can carry a penalty under the law.

24. What typically creates a shortage and why?

25. Explain some of the problems with price controls.

 Unit 3 Detailed Study Guide Appendix J1
Supply, Demand, and Pricing
Circular Flow Model

 What is the difference between the Factor Market and the Prod-
uct Market?

 Be able to interpret the following Circular Flow Model and iden-

tify the role of money in the process and the flow of goods and
services. Note: the model appearing here and on the test co-
vers the same concepts as the model we used for class discus-
sion, but this model has the “product market” at the top and the
“factor market” at the bottom. Different tests, like the EOC test,
may have a different layout of the model, but it still covers the
same concepts.

Law of Supply and Demand

 Be able to explain both of these laws and describe how they are different.

 What happens to demand when prices go up?

 What happens to the supply of a product when prices go up?

Supply and Demand Curves

Be able to interpret a demand curve (like the one below on the left) and answer questions as, “At the ten dollar price, what is the
quantity demanded for jeans?” On the demand curve seen below on the right, what is the quantity of bananas demanded at 0.60?
Demand Curve for Jeans

What are determinants/shifters and how do the make

In terms of balance between supply What is the
a demand or supply line move to the right or left? and demand, how would describe graph to
the equilibrium graph below? the left
showing?
Supply and Demand Schedules
Be able to interpret a surplus or shortage using a schedule. Appendix J2
Be able to determine the equilibrium point using a schedule.
Sample questions using the schedule to the right -
1. At the price point of $4, is there a surplus or shortage of jars?
2. At the price point of $1.50, is there a surplus or shortage of jars?
3. At what price point is there equilibrium and a perfectly competitive
market? How did you find it?

Supply and Demand Curves

Looking at the supply and demand curve to the right,
1.) What was the original equilibrium price?
2.) What is the new equilibrium price.
3.) Which curve moved to change the equilibrium price?
Was it the supply or the demand curve?
4) Did the equilibrium price go up or down?
5) What happened to amount of units demanded from the original de-
mand line to the new demand line?
6) Be able to explain how you would find an equilibrium price on a graph
like this?
7) Let’s say that this graph represents the equilibrium price of Subway
sandwiches. What would happen to the equilibrium price of sandwich-
es if the price of producing the bread dropped in price? What would
happen to the equilibrium price if the price of the meat went up?

Subsidies, Shifters/Determinants, Complements, and Substitutes

1.) In terms of supply and demand curves, what would
happen if the United States government decided to
provide a subsidy to the makers of a drug used to treat
cancer?
2) Know what a determinant/shifter is, and be able to describe
Price of Gum

what would happen to a supply or demand curve if it is

affected by a positive or a negative determinant/shifter. Be
able to describe what would happen to an equilibrium
price if these lines move. You will be given a scenario to
describe what happens.
3) What are complements and substitutes? How would
changes in the price of one of these affect a supply curve
and a demand curve? Quantity of Candy Bars
4) Using the graph on the right, the movement of the demand
curve shows that the quantity demanded of candy bars Shortages and Surpluses
decreased from D1 to D2. What caused this? (Hint: what else
Using the chart below and your notes, will a shortage or
is being shown on the graph)
surplus exist if the price of a product falls below the
equi- librium
Elasticity in Supply and Demand
1) What is meant if a product is elastic or not in terms of supply of
it and demand or it?
2) What are the basic rules to use to determine if a product has
elastic demand?
3) How do price increases affect the demand of a product in terms
Price Ceilings and Price Floors
of it’s elasticity
How do price ceilings and floors impact shortages and