Unformatted text preview: equilibrium quantity rises from Q1
to Q2. In panel (b), the equilibrium price again rises from P1 to P2,
but the equilibrium quantity falls from Q1 to Q2.
(a) Price Rises, Quantity Rises
S1 P2 (b) Price Rises, Quantity Falls Small
equilibrium S1 P2
in D2 P1 S2 D2
D1 Q1 Q2 Quantity of
Ice-Cream Q1 Q 2 Quantity of
In market economies, prices are the mechanism for allocate scarce resources.
Prices determine who produces each good and how much is produced.
If market economies are guided by an invisible hand, as Adam Smith famously suggested, then the price system is the baton that the invisible hand uses to conduct the economic orchestra. 2.5 ELASTICITY
2.5 Demand for a good is said to be elastic if the quantity demanded responds substantially to changes in the price. Demand is said to be inelastic if the quan...
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