Supply and Demand Basics
What are the two main factors that determine the price and quantity of a good or service in a market?
Supply and demand
What are the factors that can cause a shift in the supply curve?
Changes in technology, input prices, the number of firms, and expectations about future prices.
What is elasticity?
A measure of how responsive quantity demanded or supplied is to a change in price.
What is a perfectly competitive market?
A market with many small buyers and sellers, identical products, and no barriers to entry or exit.
What is a price ceiling?
A maximum price set by the government below the equilibrium price.
What is the law of supply?
As the price of a good or service increases, the quantity supplied of that good or service also increases, ceteris paribus.
What happens to the equilibrium price and quantity when the demand curve shifts to the left?
The equilibrium price decreases and the equilibrium quantity decreases.
What is the difference between price elasticity of demand and price elasticity of supply?
Price elasticity of demand measures how responsive quantity demanded is to a change in price, while price elasticity of supply measures how responsive quantity supplied is to a change in price.
What is a monopoly?
A market with only one seller.
What is a price floor?
A minimum price set by the government above the equilibrium price.
What is the law of demand?
As the price of a good or service increases, the quantity demanded of that good or service decreases, ceteris paribus.
What is the difference between a normal good and an inferior good?
A normal good is a good whose demand increases when income increases, while an inferior good is a good whose demand decreases when income increases.
What does it mean if a good has a price elasticity of demand greater than 1?
The good is considered elastic, meaning that a small change in price leads to a relatively large change in quantity demanded.
What is an oligopoly?
A market with a few large firms.
What is a subsidy?
A payment made by the government to producers or consumers.
What is a market equilibrium?
The point at which the quantity supplied of a good or service equals the quantity demanded.
What is the relationship between price and quantity demanded for a complementary good?
When the price of a complementary good increases, the demand for the other good decreases.
What is the relationship between elasticity and total revenue?
If a good is elastic, a decrease in price will increase total revenue, while an increase in price will decrease total revenue. If a good is inelastic, a decrease in price will decrease total revenue, while an increase in price will increase total revenue.
What is monopolistic competition?
A market with many firms selling differentiated products.
What is a tax?
A payment made by producers or consumers to the government.
What happens to the equilibrium price and quantity when the supply curve shifts to the right?
The equilibrium price decreases and the equilibrium quantity increases.
What is the relationship between price and quantity demanded for a substitute good?
When the price of a substitute good increases, the demand for the other good increases.
What is the formula for calculating price elasticity of demand?
Price elasticity of demand = (% change in quantity demanded) / (% change in price)
What is the difference between a natural monopoly and a geographic monopoly?
A natural monopoly occurs when a single firm can produce the entire output of a market at a lower cost than any other combination of firms. A geographic monopoly occurs when a firm has exclusive control over a resource or a geographic area.
What is the deadweight loss of a tax?
The reduction in economic welfare that occurs when a tax is imposed.