Supply and Demand Basics
The law of demand says as the price increases, quantity demand will
Decrease
Demand
To the right
Price elasticity of demand measures our responsiveness (how much we change quantity demanded) to changes in
Price
The demand curve slopes
Downwards
The law of supply says as price increases, quantity supplied
Increases
The cost of inputs is a determinant of
Supply
A decrease in the supply curve will shift the curve to the
Left
Elastic
Where quantity demand is equal to quantity supplied you have
Market Equilibrium
If price is above the market equilibrium, this will result in a
surplus
If the price of a good increases, the demand for that good will
Stay the same (price of the good does not affect the demand, it afffects the quantity demanded)
If demand shifts right the new market equilibrium quantity and price will
Decrease
If the income elasticity of a good is negative then the good is considered a
Superior Good
A firm increases the price of its good by 20%. As a result its revenue increases. The price elasticity of demand must be
Inelastic (<1)
When price increases, consumers will be unable to buy as much of a given good, this is a cause of the downward sloping demand curve and is known as the
Income Effect
The price of bananas increases, how will this affect the supply and demand of apples
Supply - no effect
Demand - Increases
There is an increase in demand and a simultaneous decrease in supply.
Price will be
Quantity will
Price increase
Quantity indeterminate
The price of one good increases by 20%, as a result the quantity demanded of another good decreases 40%, calculate the cross price elasticity of the two goods. The two goods can be considered
XEP = -2
Compliments
The cost of air travel decreases and the minimum wages of low skilled workers increases. The price and quantity of hotel rooms will
Price increase
Quantity Indeterminate
The price elasticity of demand of a good is (-).50 between points (A and B) of a demand curve. The movement from A to B represents a 20% increase in price. Using the basic price elasticity formula, what will be the change in quantity demanded?