Microeconomic Challenges Economics Unit 2 Review

Microeconomic Challenges

Economics Unit 2 Review

CapitalOne of the factors of

production that can be defined as the equipment and factories needed to

produce goods

Decrease in PriceResults in an increase in the quantity demanded of that

product

A High PriceWill usually cause producers

to supply more and consumers to buy less

Scarcity• Influences the price of a

product by causing inflation

DeflationRefers to the overall

decrease in the price of goods and services

InflationRefers to the overall

increase in the price of goods and services

EquilibriumThe point at

which supply and

demand intersect on the graph

Market Economy• Prices are established by

the interaction of supply and demand

Substitute ProductsCompetitive products which

satisfy the same need as another, thus a decrease in the price for one will usually result

in a decrease in demand for the other. (ex. Coca-Cola and

Pepsi)

Complementary Products

Products which are used together. Hot Dogs and Hot

Dog Buns are examples.

Law of DemandWhen the price of a good

rises, the amount demanded of that good falls and when the price of a good declines the amount demanded of

that good increases

DemandMeasured by the consumer desire for a product as well

as the willingness and ability to buy the product

Determinants of Demand

• Income• Consumer Expectations• Population• Consumer Tastes• Complements and

Substitutes

Increased IncomeDemand determinant which usually increases demand in

the marketplace. This means that the demand

curve will shift to the right.

Law of SupplyThe quantity of a good

supplied rises as the price rises

SupplyThe quantity which

producers are willing to produce

Determinants of Supply• Changes in the cost of resources

used to make the good• Change in the price of other goods

these resources could make• Change in technology used to make

the good• Change in producers’ price

expectations• Change in number of sellers in the

market

Shortage• Results when the price of a

product falls below the equilibrium price since demand will exceed supply (based on the laws of supply and demand)

• The quantity which results when demand exceeds or is in excess of supply at a given market price

Surplus• the excess quantity which

results when supply exceeds demand at a given price

Elastic DemandWhen a modest price

increase or decrease has a large effect on demand

Inelastic DemandWhen a modest price

increase or decrease has little or no effect on demand

Production Possibilities Curve

Shows the different quantities that a small company would produce with their limited

resources. Points along the curve represent the

opportunity cost

SubsidyA government payment to

producers which will reduce production costs. Because of

this producers would be willing to produce more items. This

will cause a the supply curve to shift to the right.

Consumers are told that the consumption of cauliflower will significantly reduce the

risk of cancer. Which scenario is likely to happen in the cauliflower market?

In the graph, what

happened to the equilibrium price when the supply curve

moved from S1 to S2?

In the graph, what might explain the

movement of the demand curve from D1 to D3?