Draw a typical supply-and-demand graph. What should you label? Put Price on the vertical axis and Quantity on the horizontal axis. Draw a downward-sloping demand curve and upward-sloping supply curve. Label their intersection equilibrium, and mark equilibrium price and equilibrium quantity.
On a typical supply-and-demand graph, show a price above equilibrium. What does the graph tell you? Quantity supplied is greater than quantity demanded, so there is a surplus.
On a typical supply-and-demand graph, show a price below equilibrium. What does the graph tell you? Quantity demanded is greater than quantity supplied, so there is a shortage.
Draw a demand curve and show what happens when the price of the good itself increases. Do not shift the demand curve. Move to a point with a lower quantity demanded on the same demand curve.
Draw a supply curve and show what happens when the price of the good itself increases. Do not shift the supply curve. Move to a point with a higher quantity supplied on the same supply curve.
Consumers' incomes rise. Assume the good is normal. What happens? Demand increases, so the demand curve shifts right. With supply unchanged, equilibrium price and quantity increase.
Consumers' incomes fall. Assume the good is normal. What happens? Demand decreases, so the demand curve shifts left. With supply unchanged, equilibrium price and quantity decrease.
The price of a substitute rises. What happens to demand for the original good? Demand for the original good increases, shifting its demand curve right.
The price of a substitute falls. What happens to demand for the original good? Demand for the original good decreases, shifting its demand curve left.
The price of a complement rises. What happens to demand for the original good? Demand for the original good decreases, shifting its demand curve left.
The price of a complement falls. What happens to demand for the original good? Demand for the original good increases, shifting its demand curve right.
Consumers develop a stronger preference for a product. What happens? Demand increases, shifting the demand curve right.
Consumers develop a weaker preference for a product. What happens? Demand decreases, shifting the demand curve left.
The number of buyers in a market increases. What happens? Demand increases, shifting the demand curve right.
The number of buyers in a market decreases. What happens? Demand decreases, shifting the demand curve left.
Consumers expect the price of a product to rise in the future. What can happen to current demand? Current demand can increase as consumers buy more now, shifting demand right.
Consumers expect the price of a product to fall in the future. What can happen to current demand? Current demand can decrease as consumers wait, shifting demand left.
A key input becomes cheaper for producers. What happens? Supply increases, shifting the supply curve right.
A key input becomes more expensive. What happens? Supply decreases, shifting the supply curve left.
Technology makes production more efficient. What happens? Supply increases, shifting the supply curve right.
Technology makes production less efficient. What happens? Supply decreases, shifting the supply curve left.
A government subsidy lowers producers' effective costs. What happens? Supply increases, shifting the supply curve right.
A government tax raises producers' costs. What happens? Supply decreases, shifting the supply curve left.
The number of sellers increases. What happens to market supply? Supply increases, shifting the supply curve right.
The number of sellers decreases. What happens to market supply? Supply decreases, shifting the supply curve left.
Production conditions become more favorable. What happens? Supply increases, shifting the supply curve right.
Production conditions become less favorable. What happens? Supply decreases, shifting the supply curve left.
Demand increases while supply stays constant. What happens to equilibrium price and quantity? Equilibrium price increases and equilibrium quantity increases.
Demand decreases while supply stays constant. What happens to equilibrium price and quantity? Equilibrium price decreases and equilibrium quantity decreases.
Supply increases while demand stays constant. What happens to equilibrium price and quantity? Equilibrium price decreases and equilibrium quantity increases.
Supply decreases while demand stays constant. What happens to equilibrium price and quantity? Equilibrium price increases and equilibrium quantity decreases.
The price of milk rises from $3.50 to $4.50. Does the milk demand curve shift? Explain. No. The higher price causes a movement along the existing demand curve, reducing quantity demanded.
The price of breakfast cereal rises. Assume cereal and milk are substitutes. What happens to milk? Demand for milk increases, shifting the milk demand curve right.
A health study makes consumers prefer milk more strongly. What happens to the milk market? Demand for milk increases, shifting demand right.
The price of feed for dairy cows falls. What happens to the milk market? Feed is an input. Lower input cost increases supply, shifting supply right; equilibrium price falls and quantity rises if demand is unchanged.
Dairy farmers switch from dairy cattle to beef cattle. What happens to milk supply? Fewer resources are devoted to milk production, so supply decreases and shifts left.
Incomes fall during a recession. Assume milk is a normal good. What happens to milk demand? Demand decreases and shifts left.
The price of yogurt rises. Does this directly shift the supply curve for milk? No. If yogurt and milk are substitutes, the higher yogurt price increases demand for milk; it does not directly shift milk supply.
The birth rate falls, reducing the number of children in the market for a child-oriented product. What happens to demand? The relevant number of buyers decreases, so demand decreases and shifts left.
A government tax is imposed on French fry production. What happens? The tax raises producers' costs, so supply shifts left. Equilibrium price rises and equilibrium quantity falls if demand is unchanged.
The price of hamburgers rises. Assume hamburgers and French fries are complements. What happens to the French fry market? Demand for French fries decreases and shifts left; equilibrium price and quantity decrease if supply is unchanged.
A product's own price changes. Should you automatically call this a demand shift? No. A change in the product's own price changes quantity demanded through movement along the existing demand curve.
A production input's price changes. Is this a movement along supply or a supply shift? It is a supply shift because an input price is a determinant of supply rather than the product's own price.
Consumers' tastes change. Is this a movement along demand or a demand shift? A demand shift, because tastes/preferences are a determinant of demand.
The number of sellers changes. Is this a movement along supply or a supply shift? A supply shift, because the number of sellers is a determinant of supply.
Draw a demand shift to the right and label the old and new demand curves. What does it mean? The new demand curve lies to the right of the original curve, meaning consumers are willing and able to buy more at every given price.
Draw a demand shift to the left and label the old and new demand curves. What does it mean? The new demand curve lies to the left of the original curve, meaning consumers are willing and able to buy less at every given price.
Draw a supply shift to the right and label the old and new supply curves. What does it mean? The new supply curve lies to the right of the original curve, meaning producers are willing to supply more at every given price.
Draw a supply shift to the left and label the old and new supply curves. What does it mean? The new supply curve lies to the left of the original curve, meaning producers are willing to supply less at every given price.
A market starts at equilibrium. Demand shifts right. Describe the complete reasoning chain. Demand increases → demand curve shifts right → at the old price there is excess demand → the market moves toward a new equilibrium → equilibrium price and quantity increase.
A market starts at equilibrium. Supply shifts left. Describe the complete reasoning chain. Supply decreases → supply curve shifts left → at the old price there is excess demand → the market moves toward a new equilibrium → equilibrium price increases and quantity decreases.
A market starts at equilibrium. Supply shifts right. Describe the complete reasoning chain. Supply increases → supply curve shifts right → at the old price there is excess supply → the market moves toward a new equilibrium → equilibrium price decreases and quantity increases.
A market starts at equilibrium. Demand shifts left. Describe the complete reasoning chain. Demand decreases → demand curve shifts left → at the old price there is excess supply → the market moves toward a new equilibrium → equilibrium price and quantity decrease.
A binding price ceiling is imposed below equilibrium. What should you draw and identify? Draw the ceiling below equilibrium price. At that legal price, quantity demanded exceeds quantity supplied; label the resulting shortage.
A binding price floor is imposed above equilibrium. What should you draw and identify? Draw the floor above equilibrium price. At that legal price, quantity supplied exceeds quantity demanded; label the resulting surplus.
Draw a PPF and identify three kinds of points. A point on the PPF is productively efficient; a point inside is inefficient; a point outside is currently unattainable.
What does movement along a PPF demonstrate? A tradeoff: producing more of one good requires producing less of the other.
What does an outward shift of a PPF demonstrate? An expansion of productive capacity, such as from more resources or improved technology.
What does a bowed-out PPF tell you about opportunity cost? Opportunity cost increases as production of one good expands because resources are not equally suited to both goods.
A society decides to produce more healthcare and less education. What economic idea does this illustrate? A tradeoff created by scarcity; resources devoted to one use are unavailable for another.
A factory produces more output using fewer workers and less energy because of automation. Which economic goal does this illustrate? Economic efficiency.
A person is free to choose what products to buy and where to work. Which economic goal does this illustrate? Economic freedom.
A government program protects people from unemployment and poverty. Which economic goal does this illustrate? Economic security.
A progressive tax system is intended to make the distribution of income fairer. Which economic goal does this illustrate? Economic equity.
A country's production of goods and services per person increases over time. Which economic goal does this illustrate? Economic growth.
A country tries to avoid major fluctuations in prices, employment, and production. Which economic goal does this illustrate? Economic stability.
A society relies on customs passed down through generations to decide what and how to produce. Which economic system is this? Traditional economy.
A central government sets production quotas and controls resources. Which economic system is this? Command economy.
Consumers and businesses make most decisions, and prices are determined largely through supply and demand. Which economic system is this? Market economy.
Markets make most decisions, but government regulates, provides public goods, and operates social programs. Which economic system is this? Mixed economy.
A government wants to mobilize resources rapidly for a huge infrastructure project. Which economic system has an advantage in this respect? A command economy can mobilize resources quickly through central planning.
Why can a command economy experience shortages or surpluses? Central planners may have difficulty matching production and allocation decisions with what consumers actually want.
Why can a market economy encourage efficiency and innovation? Competition and the profit motive give businesses incentives to lower costs, respond to demand, and innovate.
Why might a market economy fail to provide some goods or address some social costs adequately? Markets may not account for social costs or guarantee basic services for everyone.
Why is the United States described in the lecture as a mixed economy? Markets drive most economic decisions, but government also regulates, provides public goods, and operates social programs.
A flu vaccine is scarce. What economic question does allocating the vaccine raise? For whom should it be produced/distributed—who should receive the scarce vaccine?
Admission to a limited college class is scarce. What economic issue does this illustrate? An allocation problem: when demand exceeds available spots, some method must determine who receives them.