Chapter 4 supply and demand

While governmental interference with the market system can have adverse affects, the government does have a ____ _____ _____ to play in a market economy.

substantial supportive role

Demand illustrates

that people pay for goods or services according to how many benefits those goods or services will yield.

Generally, the higher the price,

the more of a good or service individuals are willing to supply.

Supply is

the schedule of quantities of a good or service that people are willing to sell at different prices.

If the price were lower, more consumers would

want to consume goods or services than producers would want to produce.

A change in the demand schedule results in a shift of the demand curve to

a completely different curve.

As price increases so does

quantity provided.

Businesses supply less at the same price as before. As costs change for businesses, opportunity costs change. On the graph, an increase in costs of grapes would lead to a lower supply of bottles of wine.

Supply Curve Shift Inward (Decrease) If the cost of jet fuel rises, that would shift the supply curve for airline flights inward to the left.

Businesses supply more at the same price as before. S1 shifts to the right to S2.

Supply Shift Outward (Increase) Improvements in technology, lower resource costs, or higher factor productivity can result in this sort of shift. If the price of jet fuel decreases, this would result in an outward shift in the supply curve of airline flights.

On Labor Day weekend of 2005, Hurricane Katrina: Temporarily shut down off-shore wells in the Gulf of Mexico. Briefly put 10% of our refineries out of commission. Caused a sudden drop in oil supply.

The result was: The government took a "hands off" approach. Gasoline prices rose sharply. People could buy all they wanted but at sharply increased prices.

When people are willing to buy fewer goods at every previous price.

If preferences or income (ability to pay) change. If there is a severe economic downturn and fewer people are taking trips, we would expect an inward shift of the demand curve.

When people are willing to buy more goods or services at every possible price. If more people want to fly to visit family at Thanksgiving than at other times, we expect an outward shift in demand for flights. D1 shifts to the right to D2 .

If preferences or income (ability to pay) increase. If perceived benefits increase, people will pay more.

Changes in the ___ of factors of production or increases in productivity shift the supply curve. Changes in_____ or the ___ ___ ____ shift the supply curve. Changes in the ___ ____ __ ___ shift the supply curve.

cost; technology; number of sellers; expectation of the price

Governments sometimes change market outcomes by: _______________ . This may create_______ or ______ .

imposing prices floors and price ceilings. shortages; surpluses

A change in the price of a good or service causes

movement along a given demand curve. Movement up or down the same curve.

If consumer preferences change, that will shift the demand curve either

outward or inward depending upon the nature of the change.

The government may ensure the smooth operation of the markets by

protecting property rights, guaranteeing enforcement of legal contracts, and issuing a supply of money that buyers and sellers readily accept.