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UNIT ONE REVIEW

11. As long as a comparative advantage exists between two beneficial terms of trade for a good are found between the
parties, there are opportunities for mutually beneficial producer’s opportunity cost of making the good and the
trade. The terms of trade indicate the rate at which one buyer’s opportunity cost of making the same good.
good can be exchanged for another. The range of mutually

Module 1.4

12. The supply and demand model illustrates how demand causes a rightward shift of the demand curve. A
markets work. The demand schedule shows the decrease in demand causes a leftward shift.
quantity demanded at each price and is represented 14. There are five main factors that shift the demand curve:
graphically by a demand curve. The law of demand • • a change in tastes
says that demand curves slope downward, meaning • • a change in the prices of related goods, such as
that as price decreases, the quantity demanded increases.
substitutes or complements
13. A movement along the demand curve occurs when • • a change in income: when income rises, the demand
the price changes and causes a change in the quantity for normal goods increases and the demand for
demanded. When economists talk of changes in demand, inferior goods decreases
they mean shifts of the demand curve — a change in the • • a change in the number of consumers (buyers)
quantity demanded at any given price. An increase in • • a change in expectations

Module 1.5
15. The supply schedule shows the quantity supplied at 17. There are five main factors that shift the supply curve:
each price and is represented graphically by a supply • • a change in input prices
curve. According to the law of supply, supply curves • • a change in the prices of related goods and services
slope upward, meaning that as price increases, the • • a change in expectations
quantity demanded increases. • • a change in the number of producers
16. A movement along the supply curve occurs when • • a change in technology
the price changes and causes a change in the quantity 18. Two related goods can be substitutes in production,
supplied. When economists talk of changes in supply, meaning that the same inputs used to make one of the
they mean shifts of the supply curve — a change in the goods could instead be used to produce the other, or
quantity supplied at any given price. An increase in complements in production, which means the two
supply causes a rightward shift of the supply curve. A goods are produced together using the same inputs.
decrease in supply causes a leftward shift.

Module 1.6
19. An economic situation is in equilibrium when no 21. An increase in demand increases both the equilibrium
individual would be better off doing something price and the equilibrium quantity; a decrease in demand
different. The supply and demand model is based has the opposite effect. An increase in supply reduces the
on the principle that the price in a market moves to equilibrium price and increases the equilibrium quantity;
its equilibrium price, or market-clearing price, the a decrease in supply has the opposite effect.
price at which the quantity demanded is equal to the 22. Shifts of the demand curve and the supply curve can
quantity supplied. This quantity is the equilibrium happen simultaneously. When they shift in opposite
quantity. directions, the change in price is predictable, but the change
20. When the price is above its market-clearing level, there is in quantity is not. When they shift in the same direction, the
a surplus that pushes the price down. When the price is change in quantity is predictable, but the change in price is
below its market-clearing level, there is a shortage that not. In general, the curve that shifts the greater distance has
pushes the price up. a greater effect on the changes in price and quantity.

Key Terms

Economics, p. 4 Factor of production, p. 4 Capital, p. 4
Trade-off, p. 4 Land, p. 4 Entrepreneurship, p. 4
Resource, p. 4 Labor, p. 4 Scarce, p. 4

Macro • Unit 1 Review 57
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