Economics Chapter 4 Test Review

A talented graphic designer, Charlotte earns money for her college bills by selling T-shirts she designs. This summer her T-shirt supplier raised its price-per-shirt. As a result, Charlotte bought only three hundred shirts to sell rather than her usual five hundred. What major factor has caused Charlotte to decrease her supply?

A change in production costs

What happens when there is a change in the quantity supplied?

A change in the quantity supplied occurs when the price consumers are willing to pay changes, causing a corresponding increase or decrease in the number of goods produced and sold.

What is the difference between a price floor and a price ceiling?

A price floor is a barrier intended to prevent the price of a certain item from falling below the market price. A price ceiling is a mandate that prices for certain products may not rise.

What is usually the simplest solution to a surplus or a shortage?

Allow the price to fall or rise respectively to the market equilibrium point.

What is the danger of a company's cutting production to deal with a surplus?

Any competition may take the company's share of the market.

As a freshman in college, Jamal buys a laptop for $800. Upon graduating four years later, he finds that potential buyers are willing to pay only $400 or less for the computer. Which of the three major factors most likely caused such a drastic reduction in price?

Changes in technology

A products market equilibrium price is static

False

Americans first learned the danger of price control in the civil war

False

Businesses often find surpluses because they reduce production cost

False

What does the market equilibrium point on a graph represent?

It represents the price at which consumers are willing to take from the market the exact quantity of a product that suppliers are willing to put into the market (the market equilibrium price).

To raise money for a trip, a youth group makes and sells cookies for $2.00 per dozen. If the cost of the supplies doubles from 50 cents to $1.00 per dozen, what will most likely happen to the cookie supply if the teen must still charge $2.00 per dozen?

It will decrease slightly.

What is the law of supply?

Other things being held constant, the higher the price buyers are willing to pay, the greater the quantity of a product a firm will produce; and the lower the price consumers are willing to pay, the smaller the quantity the supplier will produce.

In what way is a supply curve always sloped? Why?

Positively (i.e. ascending from left to right). As the price consumers will pay rises, suppliers become willing to provide more of their goods or services; and as the price consumers will pay falls, suppliers tend to provide smaller quantities of their goods or services.

What does a change in supply indicate?

Producers are willing to produce either more of a product at every price or less of a product at every price.

When do shortages occur? Who or what is often the motivating factor behind these incidents?

Shortages occur when various factors hold the price of a good lower than its market equilibrium price. Often governmental mandates are behind shortages.

How are surpluses created, and why do businesses find them counterproductive?

Surpluses are created when businesses raise their prices higher than the market equilibrium price and increase production only to have insufficient demand for the product. Surpluses are counterproductive because their carrying costs can be very high.

What is supply?

The amount of goods and services business firms are willing and able to provide at different prices.

Allowing the market to dictate prices helps the poor

True

Governmental mandates are often the cause of shortages:

True

Price ceilings are often counterproductive

True

The morning news reports three new studies revealing that eating doughnuts has enormous health benefits. By noon Daisy's Donuts is out of stock. The next day, the manager of Daisy's doubles the batches and raises the prices. Supplies last just until closing time. What economic concept has been most clearly illustrated?

a change in quantity supplied

What does a leftward shift in a supply curve indicate?

a decrease in supply

In proposing a new product for her company, a businesswoman puts together a chart detailing how much of the product the company could afford to make and sell at various prices. What has she created?

a supply schedule

What does a rightward shift in a supply curve indicate?

an increase in supply

List two possible factors leading to a change in supply without a change in price.

changes in technology, changes in production costs, and changes in the price of related goods

What is the demand solution to a shortage?

discouraging demand

What is the most significant reason for the rapid drop in the price of cellular phones and laptop computers since they were first introduced?

improvements in technology

From the standpoint of the supplier, what is the best solution to a surplus?

increasing demand

Which of the following is NOT a demand solution to a surplus?

lowering the price of the product

If the government forces homes to be rented below the market equilibrium price, what results?

shortage

What term describes the amount of a product a company is willing to provide at various prices?

supply

Economist Alfred Marshall is best known for the

supply and demand model

If the government forces milk to be sold above the market equilibrium price, what results?

surplus