MICROECONOMICS Chapter 4

Shortage

is a situation in which the quantity demanded is greater than the quantity supplied.

Surplus

is a situation in which the quantity supplied is greater than the quantity demanded

Equilibrium Price

is the price at which the quantity demanded is equal to the quantity supplied

Equilibrium Quantity

is the quantity at which the quantity demanded is equal to the quantity supplied

Vernon Smith

launched a revolution on economics by testing the supply and demand module in the lab

An increase in supply reduces prices and increases quantity

when costs fall, the supply curve shifts down and to the right, moving the equilibrium price and quantity from point a to b, a reduction in price and an increase in quantity

A free market maximizes the gains from trade...

1) The supply of goods is bought by the buyers with the highest willingness to pay. 2) The supply of goods is sold by the sellers with the lowest cost. 3) Between buyers and sellers, there are no unexploited gains from trade and no wasteful trades.

A free market maximizes the gains from trade because:

1) buyers are willing to pay more for the good than non-buyers 2) sellers are willing to sell the good at a lower price than non-sellers 3) there are no mutually profitable deals between non-sellers and non-buyers

An increase in demand increases price and quantity

and increase in demand shifts the demand curve up and to the right, moving the equilibrium from point a to point b, an increase in price and quantity

an increase in quantity demanded is a movement along fixed demand curve caused by shift in the supply curve

Panel A

an increase in demand is a shift in the demand curve up to the right

Panel B

an increase in supply is a shift in the supply curve down and to the right

Panel C

an increase in quantity supplied is a movement along a fixed supply curve caused by a shift in the demand curve

Panel D