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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. but (a) Price Rises, Quantity Rises Price of Price Ice-Cream Cone Cone Large Large increase in demand demand S2 S1 P2 (b) Price Rises, Quantity Falls Small Small increase in Price of Price demand Ice-Cream demand Cone Cone New New equilibrium equilibrium S1 P2 Small Small decrease in supply in Initial equilibrium P1 D1 Large Large decrease in supply in D2 P1 S2 D2 Initial equilibrium D1 Q1 Q2 Quantity of Quantity Ice-Cream Cones Ice-Cream Q1 Q 2 Quantity of Quantity Ice-Cream Cones Ice-Cream KEYS KEYS MARKET DEMAND SUPPLY EQUILIBRIUM 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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