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Econ Review chp 3-4
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Why is allowing the market to adjust prices often the best solution to surpluses or shortages?
Because it naturally restores equilibrium without causing long-term distortions.
Name two possible solutions to a shortage.
Increase supply or allow the price to rise to equilibrium.
What is a price ceiling?
A government-mandated maximum price that can cause shortages if set below equilibrium.
What happens when the price is set below the equilibrium price?
A shortage occurs, with demand exceeding supply.
What is a price floor?
A minimum price set by government above equilibrium that can cause surpluses.
Give one method to eliminate a surplus involving demand.
Get the demand curve to shift right through advertising or eliminating substitutes.
What are carrying costs?
Costs associated with holding large inventories.
What happens when the price is set above the equilibrium price?
A surplus occurs, with excess unsold products.
What is market equilibrium price?
The price at which consumers want to buy exactly the quantity suppliers want to sell.
What happens to supply when the price of related goods changes?
Supply of the original good may decrease if resources shift to producing a higher-priced substitute.
How do production costs affect supply?
If production costs rise, the firm decreases the quantity supplied at the same price.
Name one example of a change in technology that can affect supply.
Improvements like computers or automation.
What does a shift in the supply curve represent?
A change in supply, caused by factors other than price, shifting the curve left or right.
What happens to quantity supplied when the price changes?
A change in price results in a change in the quantity supplied.
What does a supply schedule show?
A table listing various quantities produced at various prices.
What is supply?
The amount of goods and services business firms are willing and able to provide at different prices.
How can a Christian show Christ to others during a surplus or shortage?
By demonstrating patience, fairness, and compassion, helping others in need, and encouraging ethical behavior in market dealings.
What condition causes a shortage, and what are its possible solutions?
A shortage occurs when the price is held below equilibrium. Solutions include increasing supply, decreasing demand, or allowing prices to rise.
What is the simplest solution to a surplus?
Allow the market to work by lowering the price until equilibrium is restored.
What occurs when the price of a product is higher than the equilibrium price?
A surplus occurs—quantity supplied exceeds quantity demanded.
At what point do supply and demand intersect?
At the market equilibrium point, where quantity demanded equals quantity supplied.
What three factors could lead to a change in supply?
Changes in technology, changes in production costs, changes in prices of related goods.
Which way does a supply curve slope and why?
It slopes upward because higher prices incentivize producers to supply more of the product.
State the law of supply.
Other things held constant the higher the price buyers are willing to pay the greater the quantity a firm will produce; the lower the price, the smaller the q s
What four conditions may change the demand for a product?
Changes in income, prices of related goods, tastes and preferences, and expectations about the future.
State the law of demand.
Other things being held constant, the lower the price of a good or service, the greater the quantity demanded; the higher the price, the lower the quantity dema
What is the economic definition of demand?
The quantity of a good or service that consumers are willing and able to purchase at various prices, other things held constant.
What are the three functions of prices?
Transmit information, provide incentives, redistribute income.
What does the principle of diminishing marginal utility state?
People receive less additional satisfaction from each extra unit of a good or service consumed over a period of time.
Who identified the principle of diminishing marginal utility?
The principle was identified by economists including William Stanley Jevons and others in the Marginalist revolution.
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