Module 2 Study Guide
1. Understanding Demand and Supply
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Define Demand: In economics, "demand" refers to the quantity of a good or service that
consumers are willing and able to purchase at various price levels.
Explain the Law of Demand: The Law of Demand states that, all else being equal, as
the price of a good or service decreases, the quantity demanded for it increases, and vice
versa.
Distinguish between "demand" and "quantity demanded": Demand represents the
entire relationship between the price of a good and the quantity demanded at each price
level. Quantity demanded, on the other hand, is a specific quantity of the good that
consumers are willing to buy at a given price.
Graph the Demand Curve: Create a demand curve, with price on the vertical axis (Yaxis) and quantity on the horizontal axis (X-axis).
2. Understanding Supply
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Define Supply: In economics, "supply" refers to the quantity of a good or service that
producers are willing and able to offer for sale at different price levels.
Explain the Law of Supply: The Law of Supply states that, all else being equal, as the
price of a good or service increases, the quantity supplied of it increases, and vice versa.
Distinguish between "supply" and "quantity supplied": Supply represents the entire
relationship between the price of a good and the quantity supplied at each price level.
Quantity supplied is a specific quantity of the good that producers are willing to sell at a
given price.
Graph the Supply Curve: Create a supply curve, with price on the vertical axis (Y-axis)
and quantity on the horizontal axis (X-axis).
3. Market Equilibrium and Disequilibrium
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Graph a Supply and Demand Curve Interacting: Combine a supply curve and a
demand curve on one graph (label axes). Identify the equilibrium price and quantity
where they intersect.
Describe an Above-Equilibrium Market Price: Illustrate a current market price that is
above the equilibrium price. Explain that this results in a surplus, with more goods
supplied than demanded. Over time, in a free market, you would expect the price to
decrease to reach equilibrium.
4. Changes in Supply
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Graph a Supply and Demand Curve Interacting: Reuse the supply and demand graph
and show a decrease in supply. Explain potential reasons for this decrease and how it
affects the equilibrium price (p*) and quantity (q*).
5. Price Ceilings
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Graph a Supply and Demand Curve Interacting: Continue using the same graph and
introduce an effective price ceiling. Provide a reason for why the government might
impose such a law. Clarify that a price ceiling can lead to a persistent shortage in the
market.
6. Consumer and Producer Surplus
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Identify Surplus Areas: On your supply and demand graph, point out the areas
representing consumer surplus and producer surplus. Explain how these areas signify
gains from trade for buyers and sellers.
7. Deadweight Loss
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Define Deadweight Loss: Deadweight loss represents the loss of economic efficiency in
a market due to factors like price floors or ceilings.
Graph Deadweight Loss: Create a graph showing deadweight loss (label axes) and
explain how a price floor or price ceiling can result in deadweight loss by causing
inefficient market outcomes.
8. Labor Market
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Graph the Labor Market: Draw a graph with wage rate on the vertical axis and the
quantity of labor on the horizontal axis.
Increase in Demand for Labor: Show an increase in demand for labor and explain
potential reasons for this increase. Discuss the impact on equilibrium labor hired (L*) and
the equilibrium wage rate (w*).
9. Loanable Funds Market
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Graph the Loanable Funds Market: Create a graph with interest rate on the vertical
axis and the quantity of loanable funds on the horizontal axis.
Increase in Savings Rate: Illustrate an increase in the savings rate by households.
Explain how this affects the equilibrium amount of loanable funds loaned (LF*) and the
equilibrium interest rates (r*).