Supply & Demand Basics
What is the law of demand?
As prices rise, consumers buy less.
What is a market-clearing price?
The price where quantity demanded equals quantity supplied
What are the three main functions of prices?
To signal, ration, and motivate.
What is an externality?
An indirect cost or benefit to an uninvolved third party.
What does the government do to encourage positive externalities?
Offers subsidies.
What is the law of supply?
As prices rise, producers are willing to sell more.
What happens when prices are below equilibrium?
A shortage occurs.
How do prices act as signals?
They tell producers when to increase or decrease production.
What is a positive externality?
A benefit received by people not directly involved in an economic activity.
What does the government do to discourage negative externalities?
Imposes taxes or regulations
What happens when demand increases but supply stays the same?
Prices rise until a new equilibrium is reached.
What happens when prices are above equilibrium?
A surplus occurs.
What does rationing mean in a market economy?
Goods go to those willing and able to pay the price.
What is a negative externality?
A cost suffered by people not involved in an economic activity.
How can government price controls interfere with equilibrium?
They can create shortages or surpluses.
What is the intersection of supply and demand called?
Equilibrium or market-clearing point.
What term describes the natural tendency for prices to move toward equilibrium?
The self-correcting nature of markets.
What is an example of prices motivating behavior?
High gas prices motivate consumers to buy fuel-efficient cars.
Give an example of a positive externality
Vaccinations or education benefiting society.
What happened during the 1970s gas shortage? What did the government do?
Government price controls caused long lines and rationing.
Why does a high price for oil encourage more drilling?
Because it motivates producers to increase output.
How do shortages affect prices?
Buyers compete and push prices upward.
Why are prices compared to traffic lights?
Because they signal when to “go” or “stop” for buyers and sellers.
How can the government reduce negative externalities?
By taxing harmful activities like pollution.
Why might a government restrict drilling in certain areas?
To prevent environmental damage, even if prices rise