MICROECONOMICS Study Guide Review

demand The desire to own something and the ability to pay for it

2. Demand curve A graphic representation of a demand schedule

3. Supply curve A graphic representation of the supply schedule showing the quantity supplied of a good at different prices

4. Elasticity of supply A measure of the way the quantity supplied reacts to a change in price

5. Elasticity of demand A measure of how consumers react to a change in price

6. supply The amount of goods available

7. equilibrium The point at which the quantity supplied is equal to the quantity demanded, also called the market clearing price.

8. Price ceilings Maximum price that can be legally charged for a good or service, when set below the market clearing price can cause shortages

9. price floor A minimum price for goods or services, when set above the market clearing price can cause surpluses

1. Why does the demand curve slope down? The demand curve is a graphic representation of the law of demand. It always slopes down because consumers demand more products at lower prices. They will also demand fewer products at higher prices. Whatever your income you are affected by this. The downward slope of the curve is the result of two patterns of behavior, the substitution effect and the income effect.

2. When and why does the demand curve shift? The demand curve shifts because of outside forces other than price that increase or decrease demands for products at all prices. They are called determinants of demand. Income, consumer preferences, number of buyers, price of related goods, expectations for the future. For example, if there is a massive snowstorm the demand for snow shovels will shift to the right.

3. Why does the supply curve slope up? The supply curve is a graphic representation of a supply schedule and reflects the law of supply. That the quantity supplied will be more at higher prices and less at lower prices.

4. When and why does the supply curve shift? The supply curve shifts because of outside forces other than price that increase or decrease the supply of products at all prices. They are called determinants of supply. They include changes in the costs of the factors of production, changes in technology, changes in the number of sellers, and expectation of future prices

5. Why might a good be more or less elastic? A good might be more or less elastic based upon how sensitive producers and consumers are to changes in prices. Elasticity of supply refers to how easily a supplier can enter or exit the market or change outputs in response to changes in price. Elasticity of demand refers to how a consumer will respond to change in price based upon weather or not the good is a luxury, there are substitutes available and how important is that good.

6. How do surpluses and shortages send signals to buyers and sellers? Surpluses and shortages send signals by changing the equilibrium price. If there is a shortage of a good that means that demand has exceeded supply and if all stays then same prices will rise. If there is a surplus, supply has exceeded demand and prices will fall. Surpluses and shortages also send signals that production of a good should be increased or decreased based upon weather or not there is remaining unmet demand.

7. How do firms decide how much to produce? Firms decide how much to produce based upon the possibility of profit. They have to determine if there is unmet demand that they can supply based upon how easy they can enter a market and how much consumers will respond to price changes. They must carefully consider how much of the factors of production they control to determine how many workers to hire and how much to invest.

8. How do different market structures affect society? Different market structures effect consumers in different ways. Perfect competition is a market like agricultural products. In this structure the market determines price and quality. The effect is that the consumer gets the best price. Monopoly is a market structure where one firm controls , one product and controls its price quality and distribution. The effect is that that firm could possibly charge illegally high prices for its product. In monopolistic competition firms offer similar products, like clothing. The consumer get the most amount of choice in this structure. In Monopolistic competition many firms compete by offering a variety of similar products. Consumers get choices, like a variety of clothing. Oligopoly, in this structure a few firms dominate the market for a few products. Like cell phones and household appliances. Society is affected because the firms might collude, indulge in price fixing, and price war resulting in charging illegally high prices.