Chapter 4- Supply, Demand, and Prices

Question 1

Equilibrium(5 bullet points)

Answer 1

when quantity supplied equals quantity demanded at a certain price
only one equilibrium at a time
no shortages or surpluses at equilibrium
shortage- when the quantity demanded is greater than the quantity supplied, occurs when prices are too low and sellers cant make any money
surplus- when the quantity supplied is greater than the quantity demanded
sellers get rid of surpluses by lowering the prices

Question 2

Competition(2 bullet points)

Answer 2

buyers compete with other buyers by raising prices

sellers compete with other sellers by lowering prices

Question 3

Free Market Maximizes Gains From Trade(6 bullet points)

Answer 3

unexploited gains from trade- only the buyer or supplier is made better off, happens when price is too high or low(not at equilibrium). quantity is below equilibrium
wasteful trades occur when quantity is greater than equilibrium
ONLY equilibrium has no unexploited gains or wasteful trades
buyers above equilibrium are actually buyers, those below are non buyers
sellers below equilibrium are actually sellers, those above are non sellers
total surplus(producer + consumer surplus) maximized

Question 4

Goods(2 bullet points)

Answer 4

must be produced at lowest possible cost

must satisfy high valued demand(actual buyers)

Question 5

Shifts in Equilibrium

Answer 5

increase in demand= increase in price and quantity for equilibrium
decrease in demand= decrease in price and quantity for equilibrium
increase in supply= decrease in price and increase in quantity
decrease in supply= increase in price and decrease in quantity