Demand Dynamics
What does the law of demand state?
As price rises, quantity demand falls
What does the law of supply state?
As price increases, quantity supplied increases.
Define market equilibrium
What is elasticity of demand?
The measure of how responsive quantity demanded is to price changes.
A legal maximum price that can be charged for a good or service.
Name two factors that can shift the demand curve?
Income, tastes/preferences, population, expectations, price of related goods
Name two factors that can shift supply
resource costs, technology, government intervention, number of sellers, future expectations, natural events.
What happens when the price is below equilibrium?
a shortage
What type of good has inelastic demand?
Necessities (e.g., gasoline, medicine)
What is a price floor?
A legal minimum price that must be paid for a good or service.
What is the difference between a change in quantity demanded and a change in demand?
Change in QD = movement along the curve (price change); Change in demand = entire curve shifts (non-price factors).
If technology improves, what happens to the supply curve?
It shifts to the right (increase in supply)
What happens when a price is above the equilibrium?
a surplus
What is marginal utility?
The additional satisfaction gained from consuming more unit of a product.
Give an example of a price ceiling and its effect.
Rent control -> shortage of apartments
If the price of pizza rises, what happens to the demand for hamburgers (a substitute)?
Demand for hamburgers inceases
What happens to supply if the government increases taxes on producers?
supply decreases and curve shifts left
In a market, how do shortages and surpluses get eliminated?
Price adjustments - rising or falling- move the market back to equilibrium.
Explain the law of diminishing marginal utility.
Each additional unit of a good gives less additional satisfaction than the one before.
Give an example of a price floor and its effect.
Minimum wage -> surplus of labor
Explain how future expectations can affect today's demand for a product.
If consumers expect higher future prices, current demand increases (and vice versa).
supply decreases (shifts left) and equilibrium price rises.
Demand decreases -> both equilibrium price and quantity decrease.
Give a real-world example of diminishing marginal utility.
The first slice of pizza is great, but by the fourth slice, satisfaction decreases.
A city government imposes a price floor on ride-share services (like Uber and Lyft) that is set above the equilibrium price. Demand stays the same, but more drivers join the market because of the higher guaranteed price. What is the most likely economic outcome of this policy?
There will be a surplus of ride-share drivers because the price floor is above equilibrium, causing quantity supplied to exceed quantity demanded. Riders will take fewer trips at the higher price, while more drivers will want to work.