Supply and Demand Basics
What does the Law of Demand state?
As price increases, quantity demanded decreases.
What is the difference between a movement and a shift?
Movement = price change; shift = determinant change.
What is equilibrium?
Where quantity supplied equals quantity demanded.
If demand changes a lot when price changes, it is…
Elastic.
What is a price ceiling?
Legal maximum price.
What does the Law of Supply state?
As price increases, quantity supplied increases.
If the price of burgers rises and people buy fewer burgers, is that a shift or movement?
Movement along the curve.
What happens when price is above equilibrium?
Surplus.
If a good has few substitutes, demand is likely…
Inelastic.
What is a price floor?
Legal minimum price.
What causes a demand curve to shift right?
Increase in income (for normal goods), increase in population, increase in taste, etc.
If consumer income increases for a normal good, what happens?
Demand shifts right.
What happens when price is below equilibrium?
Shortage.
Are necessities usually elastic or inelastic?
Inelastic.
What does a price ceiling below equilibrium create?
Shortage.
Give one factor that shifts supply
Technology, input costs, taxes, number of sellers.
A new technology lowers production costs. What happens?
Supply shifts right.
How does a shortage correct itself?
Price rises → Qd decreases, Qs increases.
If demand is inelastic and price increases, what happens to total revenue?
It increases.
What does a price floor above equilibrium create?
Surplus.
Why are supply and demand curves shaped the way they are?
Demand slopes down due to diminishing marginal utility; supply slopes up due to increasing opportunity cost.
Gas prices rise due to a hurricane damaging refineries. Which curve shifts and why?
Supply shifts left due to decreased production.
Why is equilibrium considered efficient?
Maximizes total surplus.
Why is supply more elastic in the long run?
Firms have more time to adjust production.
Why do price controls create deadweight loss?
Prevent mutually beneficial trades.