Midterm 1

# A retailers cute the price of the software b a

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a) Retailers cute the price of the software. b) A technological advance allows the software to be produced at a lower cost.

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c) Professional tax return preparers raise the price of the services they provide. d) Equilibrium Equilibrium Price: -The price that equates quantity supplied with quantity demanded. Surplus
- When quantity supplied is greater than quantity demanded. Facing a surplus sellers try to increase sales by cutting price. This causes the quantity demanded to rise and the quantity supplied to fall. - Prices will continue to fall until the surplus is eradicated Shortage - When quantity demanded is greater than quantity supplied. - *If you are not at the equilibrium market forces will push you towards the equilibrium. Three steps in analyzing changes in equilibrium: To determine the effects of any event: 1. Decide whether the event shifts the supply curve or the demand curve or both 2. Decide in which direction the curve shifts 3. Use a supply demand diagram to see how the shift changes the equilibrium price and quantity. EXAMPLE ONE: - Event to be analyzed: Increase in price of gas

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- Process of analyzation: 1. Demand curve shifts 2. Demand curve shifts right because high gas prices make hybrids more attractive relative to other cars. 3. This shift causes an increase in price and quantity of hybrid cars. NOTE: Notice that when price rises producers supply a larger quantity of hybrids, even though the supply curve does not shift. *Always be careful to distinguish between a shift in a curve and a movement along the curve. Shifts of the Curve vs. Movement Along the Curve 1. Change in supply= A shift in the supply curve - Occurs when a non price determinant of supply changes (like technology or costs) 2. Change in the quantity supplied= A movement along a fixed supply curve. -This occurs when price changes. 3. Change in demand= A shift in the demand curve -Occurs when a non price determinant of demand changes (like income or number of buyers) 4. Change in the quantity demanded= A movement along a fixed demand curve - Occurs when price changes EXAMPLE TWO: A shift in both Supply and Demand -Event: The price of gas rises and new technology reduces production costs. 1. Both curves shift 2. Both the demand and supply curve shift to the right (because both increase)
3. Quantity rises but the effect on price is ambiguous: If demand increases more than supply, price rises. *But if supply increases more than demand, price falls. Therefore, the effect on price depends on the magnitude of the different shifts. ALL OF THE ABOVE FROM CHAPTER FOUR LOOKS AT ONE OF THE TEN PRINCIPLES OF ECONOMICS: Markets are usually a good way to organize economic activity - In market economies, pries adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.

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