Supply and Equilibrium Test Review KEY
1. SUPPLY - The Law of Supply— the quantity of a product supplied varies directly with price (as price goes up,
quantity supplied goes up – as price goes down, quantity supplied goes down)
2. Supply Schedule— A chart or table that lists the quantity that all producers within an industry or market will
produce at each given price.
3. Supply curve— Graph that represents the different quantities that will be supplied at each given price.
4. Supply is upward sloping because businesses are willing to supply more as prices go up.
5. Change in Quantity Supplied – This is a movement ALONG the curve resulting from a change in price – As
prices change, producers will be willing to produce more or less (depending on the direction of the price
change) resulting in a new point on the same graph.
6. Change in Supply – Change in supply is when there is a shift in the entire supply curve resulting from some
outside force that changes the amount of a product supplied at each given point.
7. Determinants of Supply— Forces that will cause the entire supply curve to shift either left or right.
8. List the Determinants of Supply –
 Factor Cost
 Technology and Regulations
 Expectations
 Number of Firms
9. If it costs more to make an item, will you make more or less? Less, so the curve shifts to the LEFT.
10. If it costs less to make an item, will you make more or less? More, so the curve shift to the RIGHT.
11. Anything that will affect the cost of ANY of the factors of production (land, labor, capital) will shift the curve.
12. Supply Curves can be more vertical or more horizontal, and this is due to differences in supply elasticity.
13. Supply elasticity – a measure of the way in which quantity supplied responds to a change in price – The quicker
a company can respond to a price change, the more elastic the supply.
14. Elastic supply – a small change in price results in a relatively large change in quantity supplied – the supply
curve is more horizontal.
15. Inelastic supply— a small change in price results in a small change in quantity supplied – the supply curve is
more vertical – producers do not have much control over Qs, even if price changes.
16. Unit Elastic— a change in price results in a proportionally equal change in Qs.
17. Supply is inelastic when there is some sort of technical or natural constraint that will not allow producers to
increase production even though the selling price has increased.
18. Supply is elastic when producers can easily and quickly respond to changes in price by producing more or less
of a good.
19. Equilibrium – The condition that exists when quantity supplied and quantity demanded are equal.
20. At equilibrium, there is no tendency for the market price to change.
21. The markets naturally tend towards equilibrium.
22. Shortage – the condition that exists when quantity demanded exceeds quantity supplied at the current price.
23. When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored.
24. If the market were to stay in a shortage condition, buyers would begin to outbid each other to get the product.
25. Surplus – the condition that exists when quantity supplied exceeds quantity demanded at the current price.
26. When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored.
27. Higher demand leads to higher equilibrium price and higher equilibrium quantity.
28. Higher supply leads to lower equilibrium price and higher equilibrium quantity.
29. Lower demand leads to lower equilibrium price and lower equilibrium quantity.
30. Lower supply leads to higher equilibrium price and lower equilibrium quantity.
31. If there is a change in demand or supply, the entire curve will shift - When this happens, there is a new point
where Qs = Qd.
 This is what the market will work towards to make the new equilibrium price
32. Say there is an increase in demand and the entire demand curve shifts right:
 This increase in demand will create a new equilibrium point
 The equilibrium price and quantity are both increased
33. If there is an increase in supply, the entire supply curve will shift right:
 The increase in the supply curve causes equilibrium price to decrease and equilibrium quantity to
increase.
34. Sometimes, in order to reach these social goals, prices must be set at “socially desirable” levels - This is called a
Price Control.
35. Price Control – When the government or some outside force sets the market price at a level other than market
equilibrium.
36. Price Ceiling – A type of government regulation (and a type of price control) that prevents prices from rising
above a certain level.
37. Price ceilings can lead to shortages because at the set price (below equilibrium) Qd > Qs.
38. Price Floor – Another type of government regulation (and price control) that prevents prices from falling below
an certain level.
39. Price floors cause surpluses because Qs>Qd.
40. Minimum wage is a type of price floor because employers are legally required to pay a minimum (or floor)
wage. There are more suppliers of labor than there is a demand for labor at the minimum wage.
41. Price Supports— a type of price floor where the government subsidizes and industry to help the market. Most
common price support is agricultural price supports.
42. Price Freeze— a government restriction placed on a product that will keep prices from increasing – This is
usually done in times of emergency or tragedy to keep people from price gouging.