Economics Study Guide Unit 2: Market Economies at Work: Supply & Demand
I.)
Demand
1.) What is Demand
Demand is the desire for a good or service and the ability to pay for it
A) The Law of Demand:
When Prices Fall, Consumers Buy More, When Prices Rise they Buy Less
B) Demand Schedules:
1) Individual Demand Schedule: How many products someone will buy at each price.
2) Market Demand Schedule: How many ALL the people will buy.
C) Demand Curves
1) Individual Demand Curve: Graph of Individual Demand Schedule
2) Market Demand Curve: Graph of Market Demand Schedule
2.) What Factors Affect Demand
A) Law of Diminishing Marginal Utility:
The Benefit from each additional unit purchased tends to decline.
B) Income
C) Market Size
D) Consumer Tastes
E) Consumer Expectations
F) Substitutes
G) Complements
3.) What is the Elasticity of Demand
The Responsiveness of Consumers to Price Changes in the Market
Elastic vs. Inelastic: Video Games & Insulin
If the price of video games were to drop, people would likely buy more.
A) What Determines Elasticity?
1) Substitute Goods or Services If the price rises, they will likely buy fewer. However, diabetics will need
to buy the same amount of insulin regardless of price. This means the
2) Proportion of Income
demand for insulin is inelastic
3) Necessities vs. Luxuries
B) Calculating Elasticity: Will a Sale Help?
C) Total Revenue Test: Will selling more products at lower prices make you more money?
II.)
Supply
1.) What is Supply
Supply is the Willingness and Ability of Producers to Offer Goods and Services for Sale
A) The Law of Supply:
Producers are willing to sell more of a good or service at a higher price than at a lower one.
B) Supply Schedules:
1) Individual Supply Schedule:
How much of a product an individual producer will make at each price in a market
2) Market Supply Schedule: How many ALL the people will buy.
How much of a product all producers will make at each price in a market
C) Demand Curves
1) Individual Supply Curve: Graph of Individual Supply Schedule
2) Market Supply Curve: Graph of Market Supply Schedule
2.) What are the Costs of Production
A) Labor Affects Production: Efficiency and Utilization
B) Production Costs
1) Give an example of a way to increase labor efficiency
1) Fixed Costs
2) What are examples of fixed costs?
2) Variable Costs
3) What are examples of variable costs?
3). What Factors Affect Supply
Changes in Quantity Supplied: Increase or Decrease in the amount of good or service that
Producers are willing to sell because of a change in price
A) Input Costs:
B) Labor Productivity
1) Give an example of an input cost
C) Technology
2) What is an excise tax?
D) Government Action
3) How could technology increase supply?
E) Producer Expectations
F) Number of Producers
4.) What is the Elasticity of Supply?
A Measure of how responsive producers are to Price Changes
Elastic vs. Inelastic: Leather Boots vs Olive Oil
A new popular leather boot sells out at $50. The Company raises the price to $150 and they
keep selling. The company can buy more leather and make more. The supply of the boots is
elastic. Olive Oil Prices rise, but supply cannot keep up as there are only so many olive
groves producing. The supply of olive oil is inelastic
III.) Demand, Supply, and Prices
1.) Seeking Equilibrium: Supply and Demand
A) The Interaction of Supply and Demand: Market Equlibrium
B) Reaching the Equilibrium Price
1) What is the equilibrium price?
C) Equilibrium Price in Real Life
2) What are surpluses and shortages? How and why do
they sometimes occur?
2.) Prices as Signals and Incentives
A) How the Price System Works
B) Prices Motivate Producers & Consumers
1) What is competitive pricing?
2) Why do high prices sometimes signal
consumers to buy?
3.) Intervention in the Price System
A) Imposing Price Ceilings: Ex: Rent Control
B) Setting Price Floors: Ex: Minimum Wage
C) Rationing Resources & Products
1) Give examples of reasons governments might intervene in the price system.
2) What are “Black Markets”
IV.) Market Structures
1.) What is Perfect Competition
A) Many Buyers and Sellers
B) Standardized Product
C) Freedom to Enter and Exit Markets
D) Independent Buyers and Sellers
E) Well Informed Buyers and Sellers
Competition in the Real World:
Corn: Many farmers, many buyers, standardized
product. It appears to be perfect competition. But corn
farmers will band together to keep prices high. Often
there are government subsidies to help keep farmers
afloat financially, etc
2.) The Impact of Monopoly
A) Characteristics of a Monopoly
1) What is OPEC? How does it affect our economy?
1) Only One Seller
2) What is a patent and how does it affect
2) A Restricted or Regulated Market
competition in a market?
3) Control of Prices
B) Types of Monopolies
1) Natural Monopoly: Ex: A Water Company
2) Government Monopoly: Ex: The Postal Service
3) Technological Monopoly: Ex: Polaroid
4) Geographic Monopoly: Ex: Professional Sports
C) Profit Maximization by Monopolies
3.) Other Market Structures
A) Characteristics of Monopolistic Competition
1) Many Sellers and Many Buyers
1) How can competition be monopolistic?
2) Similar, but Differentiated Products
2) What is product differentiation?
3) Limited Control of Prices
3) What is Non-Price Competition?
4) Freedom to Enter or Exit Market
B) Characteristics of an Oligopoly
1) Few Sellers and Many Buyers
2) Standardized or Differentiated Products 1) Give examples of oligopolies?
2) What are some reasons they occur?
3) More Control of Prices
4) Little Freedom to Enter or Exit Market
4.) Regulation and Deregulation Today
A) Promoting Competition
Ex: Antitrust Legislation
B) Ensuring a Level Playing Field
Prohibiting Unfair Business Practices: Price Fixing, Market Allocation, Predatory Pricing
C) Protecting Consumers
Consumer Protection Agencies
D) Deregulating Industry
1) What is Anti-Trust Legislation?
2) Describe Price Fixing, Market Allocation and Predatory Pricing: Give Examples
3) What are some US Government Agencies that regulate trade? How do they do it?