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Microeconomic Challenges
Economics Unit 2 Review
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CapitalOne of the factors of
production that can be defined as the equipment and factories needed to
produce goods
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Decrease in PriceResults in an increase in the quantity demanded of that
product
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A High PriceWill usually cause producers
to supply more and consumers to buy less
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Scarcity• Influences the price of a
product by causing inflation
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DeflationRefers to the overall
decrease in the price of goods and services
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InflationRefers to the overall
increase in the price of goods and services
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EquilibriumThe point at
which supply and
demand intersect on the graph
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Market Economy• Prices are established by
the interaction of supply and demand
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Substitute ProductsCompetitive products which
satisfy the same need as another, thus a decrease in the price for one will usually result
in a decrease in demand for the other. (ex. Coca-Cola and
Pepsi)
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Complementary Products
Products which are used together. Hot Dogs and Hot
Dog Buns are examples.
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Law of DemandWhen the price of a good
rises, the amount demanded of that good falls and when the price of a good declines the amount demanded of
that good increases
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DemandMeasured by the consumer desire for a product as well
as the willingness and ability to buy the product
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Determinants of Demand
• Income• Consumer Expectations• Population• Consumer Tastes• Complements and
Substitutes
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Increased IncomeDemand determinant which usually increases demand in
the marketplace. This means that the demand
curve will shift to the right.
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Law of SupplyThe quantity of a good
supplied rises as the price rises
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SupplyThe quantity which
producers are willing to produce
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Determinants of Supply• Changes in the cost of resources
used to make the good• Change in the price of other goods
these resources could make• Change in technology used to make
the good• Change in producers’ price
expectations• Change in number of sellers in the
market
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Shortage• Results when the price of a
product falls below the equilibrium price since demand will exceed supply (based on the laws of supply and demand)
• The quantity which results when demand exceeds or is in excess of supply at a given market price
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Surplus• the excess quantity which
results when supply exceeds demand at a given price
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Elastic DemandWhen a modest price
increase or decrease has a large effect on demand
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Inelastic DemandWhen a modest price
increase or decrease has little or no effect on demand
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Production Possibilities Curve
Shows the different quantities that a small company would produce with their limited
resources. Points along the curve represent the
opportunity cost
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SubsidyA government payment to
producers which will reduce production costs. Because of
this producers would be willing to produce more items. This
will cause a the supply curve to shift to the right.
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Consumers are told that the consumption of cauliflower will significantly reduce the
risk of cancer. Which scenario is likely to happen in the cauliflower market?
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In the graph, what
happened to the equilibrium price when the supply curve
moved from S1 to S2?
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In the graph, what might explain the
movement of the demand curve from D1 to D3?
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