Chapter Review

Summary
1. How do we decide who gets the scarce goods and resources?

Answer An allocation system is a way to determine who gets the scarce goods and resources. Allocation schemes include lottery; government; market; and firstcome, first-served. 1 The advantage of a market system over other allocation schemes is the incentive created by the market system. 1.b 2. What is demand?

Answer Demand is the quantities that buyers are willing and able to buy at alternative prices. 3 The quantity demanded is a specific amount at one price. 3 The law of demand states that as the price of a well-defined commodity rises (falls), the quantity demanded during a given period of time will fall (rise), everything else held constant. 3.a Demand will change when one of the determinants of demand changes, that is, when income, tastes, prices of related goods and services, expectations, or number of buyers changes. A demand change is illustrated as a shift of the demand curve. 3.e 3. What is supply?

Answer Supply is the quantities that sellers will offer for sale at alternative prices. 4.a The quantity supplied is the amount that sellers offer for sale at one price. 4.a The law of supply states that as the price of a well-defined commodity rises (falls), the quantity supplied during a given period of time will rise (fall), everything else held constant.4.a Supply changes when one of the determinants of supply changes, that is, when prices of resources, technology and productivity, expectations of producers, the number of producers, or the prices of related goods or

services change. A supply change is illustrated as a shift of the supply curve. 4.d 4. How is price determined by demand and supply?

Answer Together, demand and supply determine the equilibrium price and quantity. 5 5. What causes price to change?

Answer A price that is above equilibrium creates a surplus, which leads to a lower price. A price that is below equilibrium creates a shortage, which leads to a higher price. 5.a A change in demand or a change in supply (a shift of either curve) will cause the equilibrium price and quantity to change. 5.b, 5.c 6. What happens when price is not allowed to change with market forces?

Answer Markets are not always in equilibrium, but when not, surpluses or shortages arise and force the price to move them toward equilibrium. 5.d A price floor is a situation in which a price is not allowed to decrease below a certain levelit is set above the equilibrium price. This creates a surplus. A price ceiling is a case in which a price is not allowed to riseit is set below the equilibrium price. This creates a shortage. 5.d