Chapter 6

Explain how supply and demand create equilibrium in the marketplace.

When supply is higher than demand, the market enters a state of disequilibrium called a surplus. when demand is higher than supply, the market enters a state of disequilibrium called shortage.

black market

a market in which goods are sold illegally

supply shock

a sudden shortage of goods

rationing

a system of allocating scarce goods and services using criteria other than prices.

What factors affect prices?

(Dis)Equilibrium, shortage, surplus, price ceilings and price floors, minimum wages,

Disequilibrium

A graphic representation of a demand schedule, Any price or quantity not at equilibrium; when quantity supplied is not equal to quantity demanded in a market

price ceiling

A legal maximum on the price at which a good can be sold

surplus

A situation in which quantity supplied is greater than quantity demanded.

equilibrium

A situation in which the market price has reached the level at which quantity supplied equals quantity demanded

Shortage

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

Explain how a price-based system leads to a wider choice of goods and more efficient use of resources.

Consumers can compare prices and choose among similar products.

How do market reacts to an increase or decrease in supply?

High supply will cause an surplus, while low supply causes a shortage.

How do changes in supply and demand affect equilibrium?

It will either push the market to equilibrium, or pull the market away from equilibrium.

Identify two ways that the government steps in to control prices.

Minimum wage, and price ceiling

Describe what happens to price when equilibrium is disturbed.

Prices are changed to put the market back in a state of equilibrium.

List advantages in a price-based system.

Prices are flexible, the price system is free. Consumers are making better decisions, faster.

What roles do prices play in a free market economy?

Prices are tools for distributing goods and resources throughout the economy.

Identify the many roles that prices play in a free market economy?

Prices can be used as incentives, and signals. They are also flexible so they can be easily changed.

Explain why a free market naturally move away from equilibrium.

Shortages causes prices raise to equilibrium and surplus causes prices to lower to equilibrium.

excess demand

when quantity demanded is more than quantity supplied