Economics Micro & Macro (CliffsAP)

Government

Any change in taxes or subsidies can make it easier or more difficult for producers to make their product. If a firm is pro-
ducing a product that yields a high social cost, then the government can choose to limit the firm’s supply by increasing
taxes. The opposite can happen if a firm is producing a product with a high social benefit: the government can either
lower taxes or increase subsidies to the firm, thereby increasing the firm’s supply.

Note:In economics, a decrease in supply or demand is always shown by a shift to the left. An increase in supply or
demand is always indicated by a shift to the right. Do not refer to these shifts as movements up or down; they are left
or right shifts.

Mini-Review

1. Which one of the following is not a determinant of supply?
   A. Income
   B. Input costs
   C. Number of suppliers
   D. Supplier expectations
   E. Government


2. The law of supply states that:
   A. As prices rise, so does demand.
   B. As prices rise, supply falls.
   C. Supply increases as demand increases.
   D. As prices rise, quantity supplied rises.
   E. Prices have nothing to do with supply.


3. On a supply curve, prices and quantity are:
   A. Inversely related
   B. Not related
   C. Not shown
   D. Positively related
   E. Independent variables

Mini-Review Answers

1. A.Income is not a factor that determines supply. Income is a term used for consumers, not producers.


2. D. The law of supply states that as prices rise, the quantity supplied rises. When producers raise their prices, they
   can afford to increase their supply by paying more for their input costs, thereby increasing their quantity of the
   product.


3. D. A positive relationship between price and quantity means that as one rises, the other follows. Producers
   increase supply by raising their price.

Supply and Demand

The point at which supply and demand curves intersect is called market equilibrium. The word equilibriummeans bal-
ance, a point of harmony, where supply and demand meet. It is when the quantity demanded equals the quantity supplied.
Equilibrium prices are all around us. When you visit a store, every price you see for a product is an equilibrium price. It is
important to remember that equilibrium prices are not fixed; they fluctuate with the forces of supply and demand. When
there is too much demand (shortage) or too much supply (surplus), we have what economists refer to as disequilibrium.

Part I: The Fundamentals