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Economics Supply and Demand Review The test will be about Demand, Supply, Elasticity, Equilibrium, Shortages and Surpluses. Demand: A change in Quantity Demanded means that What is a change in Demand? CORRECT ANSWER UNDERLINED CORRECT ANSWER UNDERLINED Moving from one point on a demand curve to another point on the same curve Moving from one point on a demand curve to another point on the same curve OR OR Drawing a new demand curve Drawing a new demand curve Draw 2 graphs: one that shows an increase in Quantity Demanded AND one that shows a decrease in Quantity Demanded Draw 2 graphs: one that shows an increase in Demand AND a decrease in Demand Increase in Quantity Demanded Increase in Demand P1 D P2 QD1 DD2 D1 QD2 Decrease in Quantity Demanded Decrease in Demand P2 D P1 D2 QD2 QD1 D1 What is the mnemonic (memory) device to help you remember the determinants of Demand? CSI:A C omplementary good prices S ubstitute good prices I ncome of consumers A ttitudes, Trends & Number of Consumers Substitutes If the price of a substitute increases, what happens to the demand for the product being graphed? Demand for good increases If the price of a substitute decreases, what happens to the demand for the product being graphed? Demand for good decreases Complements If the price of a complement increases, what happens to the demand for the product being graphed? Demand for good decreases If the price of a complement decreases, what happens to the demand for the product being graphed? Demand for good increases Income If consumer income increases, what will happen to the demand for a product? Demand increases If consumer income decreases, what will happen to the demand for a product? Demand decreases An increase in taxes will ___decrease_______ a person’s income A decrease in taxes will _____increase_______ a person’s income Attitudes, Trends, Number of Consumers Attitudes, Trends, Number of Consumers A change in the amount of buyers of a product would be Number of Consumers Anything that makes the good more popular will ____increase_____ the demand for the good New information about a product would be considered Attitudes A good’s popularity with society would be considered Trends Anything that makes the good less popular will _____decrease______ the demand for the good Supply What is a change in Quantity Supplied? What is a change in Supply? CORRECT ANSWER UNDERLINED CORRECT ANSWER UNDERLINED Moving from one point on a supply curve to another point on the same curve Moving from one point on a supply curve to another point on the same curve OR OR Drawing a new supply curve Drawing a new supply curve Draw 2 graphs: one that shows an increase in Quantity Supplied AND one that shows a decrease in Quantity Supplied Draw 2 graphs: one that shows an increase in Supply AND a decrease in Supply Increase in Quantity Supplied Increase in Supply S1 S2 S P2 P1 QS1 QS2 Decrease in Quantity Demanded Decrease in Supply S2 S1 P2 D P1 QD2 QD1 What is the mnemonic (memory) device to help you remember the determinants of Supply? TING T echnology I nput prices N umber of sellers G overnment Action Inputs If the price of an input increases and the input becomes more expensive, what impact will it have on the Supply of a good? Supply decreases If the price of an input decreases and the input becomes less expensive, what impact will it have on the Supply of a good? Supply increases Technology Government Action A change in technology will always cause what type of change in Supply? What happens to the supply of a good if the government imposes a sales tax on that good? Supply decreases Increase in Supply A tariff, an embargo, and trade sanctions will all cause what type of change in Supply? Supply decreases What will happen to the Supply of a good if the government removes a tariff, embargo or trade sanctions? Supply increases Number of Sellers If manufacturers go bankrupt, go out of business or are merged together, what will happen to the Supply of the good they make? Supply decreases If more manufacturers begin to make the good, what will happen to the Supply of the good they make? Supply increases If a natural disaster occurs, what will happen to the Supply of a good? Supply decreases What happens to the supply for cupcakes if the price of sugar falls? Supply increases What happens to the supply of lawn care if the minimum wage is increased? Supply decreases Equilibrium: Where is the equilibrium point found on a graph? Where D and S intersect At the equilibrium point, what is true about the number of buyers (QD) compared to the number of sellers (QS)? Draw a graph for a market and label the equilibrium Price and equilibrium Quantity QS = QD S Pe D Qe Draw a correctly labeled graph that shows an increase in Demand (both curves are on a market graph) Draw a correctly labeled graph that shows a decrease in Demand (both curves are on a market graph) S S P2 P1 P1 P2 D2 D1 D1 Q1 Q2 D2 Q2 Q1 What happens to the equilibrium Price? Price increases What happens to the equilibrium Price? Price decreases What happens to the equilibrium Quantity? Quantity increases What happens to the equilibrium Quantity? Price decreases Draw a correctly labeled market graph that shows an increase in Supply (both curves are on a market graph) Draw a correctly labeled graph that shows a decrease in Supply (both curves are on a market graph) S1 S2 S2 P1 S1 P2 P2 P1 D1 Q1 Q2 D1 Q2 Q1 What happens to the equilibrium Price? Price decreases What happens to the equilibrium Quantity? Quantity increases In the market for daycare: the number of children born in the US has steadily decreased since the year 2000 What happens to the equilibrium Price? Price increases What happens to the equilibrium Quantity Quantity decreases In the market for strawberries: there is a disease that is attacking the strawberry plants this growing season Does this headline impact the Supply or Demand for daycare? Demand for daycare Does this headline impact the Supply or Demand for strawberries? Supply of strawberries Will it cause an increase or a decrease? Increase in Demand Will it cause an increase or a decrease? Decrease in Supply What will happen to the Price and Quantity in the market? Price will increase Quantity will increase In the market for cheese: the price of crackers decreases? What will happen to the Price and Quantity in the market? Price will increase Quantity will decrease In the market for pizza: the price of cheese increases? Does this headline impact the Supply or Demand for cheese? Demand for Cheese Does this headline impact the Supply or Demand for pizza? Supply of pizza Will it cause an increase or a decrease? Increase in Demand Will it cause an increase or a decrease? Decrease in Supply What will happen to the Price and Quantity in the market? Price will increase Quantity will increase What will happen to the Price and Quantity in the market? Price will increase Quantity will decrease In the market for ipods: the government mails a $500 stimulus package check to every household in America? In the market for potato chips: two new chip companies begin producing chips? Does this headline impact the Supply or Demand for ipods? Demand for ipods Does this headline impact the Supply or Demand for potato chips? Supply of potato chips Will it cause an increase or a decrease? Increase in Demand Will it cause an increase or a decrease? Increase in Supply What will happen to the Price and Quantity in the market? Price will increase Quantity will increase In the market for apples: the surgeon general finds that eating them helps give a person better looking skin What will happen to the Price and Quantity in the market? Price will decrease Quantity will increase In the market for corn: a new machine is developed that greatly reduces the time needed to harvest crops Does this headline impact the Supply or Demand for apples? Demand for apples Does this headline impact the Supply or Demand for corn? Supply of Corn Will it cause an increase or a decrease? Increase in Demand Will it cause an increase or a decrease? Increase in Supply What will happen to the Price and Quantity in the market? Price will increase Quantity will increase In the market for cars: the US places a tariff on cars imported from Europe and Asia What will happen to the Price and Quantity in the market? Price will decrease Quantity will increase In the market for French fries: the price of onion rings drops Does this headline impact the Supply or Demand for cars? Supply of Cars Does this headline impact the Supply or Demand for French fries? Demand for French fries Will it cause an increase or a decrease? Decrease in Supply Will it cause an increase or a decrease? Decrease in Demand What will happen to the Price and Quantity in the market? Price will increase Quantity will decrease What will happen to the Price and Quantity in the market? Price will decrease Quantity will decrease Shortages and Surpluses: In a surplus, circle the correct relationship between QS and QD In a shortage, circle the correct relationship between QS and QD QS = QD QS > QD QD > QS QS = QD QS > QD QD > QS Draw a graph that shows a surplus. You must label the QD and the QS Draw a graph that shows a shortage. You must label the QD and the QS S S P P D QD QS D QS QD If there is a surplus in a market: If there is a shortage in the market: Is the price higher or lower than the equilibrium price? Higher than equilibrium Is the price higher or lower than the equilibrium price? Lower than equilibrium What direction will the price move to reach the equilibrium? It will fall lower What direction will the price move to reach the equilibrium? It will rise higher Price Ceilings and Price Floors A Price Ceiling causes a permanent A Price Floor causes a permanent _____shortage________ _______surplus___________ Draw a graph that shows a price ceiling. You must label the QD and the QS Draw a graph that shows a price floor. You must label the QD and the QS S S Price Floor Price Ceiling D D QS QD QD QS If there is a price ceiling in a market: If there is a price floor in the market: Is the price higher or lower than the equilibrium price? Lower than equilibrium Is the price higher or lower than the equilibrium price? Higher than equilibrium Is the price ceiling intended to help the buyers or the sellers? Help the buyers Is the price floor intended to help the buyers or the sellers? Help the sellers Elasticity Elasticity is the sensitivity of a good’s demand to a change in price In a situation with Elastic demand, which will be the bigger movement? Explain this in other words: The change in Price or The change in Quantity How much does the Q of a good change because buyers change their mind about purchasing the product Inelastic demand Elastic demand When the Price of a good changes, __FEW___ people change their minds about buying the good When the Price of a good changes, __MANY__ people change their minds about buying the good Compared to a normal demand curve, an inelastic demand curve is what shape? steeper Draw a graph with an inelastic demand curve. Show the price increasing, as well as the change in quantity Compared to a normal demand curve, an elastic demand curve is what shape? flatter Draw a graph with an elastic demand curve. Show the price increasing, as well as the change in quantity P2 P2 P1 P1 D D Q2 Q1 The percentage change in Price is larger than the percentage change in Quantity …in other words, the number of buyers who stop buying the product when the price increased was small In a situation with Inelastic demand, which will be the bigger movement? The change in Price or The change in Quantity Q2 Q1 The percentage change in Quantity is larger than the percentage change in Price …in other words, the number of buyers who stop buying the product when the price increased was large What is the formula for Total Revenue? Total Revenue = Price of the good times Quantity sold TR = P x Q When using the Total Revenue Test, what directions do Price and Total revenue move when demand is elastic? When using the Total Revenue Test, what direction do Price and Total revenue move when demand is inelastic? Opposite directions Same direction Use the Total Revenue Test to determine whether the good has Elastic or Inelastic demand: Use the Total Revenue Test to determine whether the good has Elastic or Inelastic demand: Old New P 11 10 Q 6 7 TR 66 70 Old New P 5 8 Direction Price moves: ↑ ↓ Direction Price moves: ↑ Direction TR moves: ↑ Direction TR moves: ↑ Demand for this good is: Elastic ↓ Q 10 8 ↓ ↓ Demand for this good is: Inelastic TR 50 64 Fill in the flow chart for finding Market Equilibrium: Equilibrium Flow Chart Remember that you will always shift ONE curve Does a good change price in the problem? YES NO Figure out the relationship between them Figure out if the information in the headline will Use them together? ______Complements______ shift the __Demand_____ curve Use them in place of each other? ______Substitutes________ change the __Number of people who will__buy the good OR change the _number of products __ there are for sale Number of buyers changes? shift the ___Demand___ curve shift the ___Demand_____ curve I_ncome of consumers___ Use one to make the other? A_ttitudes, Trends & Number of Consumers__ _______Inputs___________ shift the ___Supply_______ curve Number of goods for sale changes? shift the ___Supply_______ curve T__echnology____________ N_umber of sellers_________ G_overnment Action________