Demand Basics
Define the Law of Demand
As price increases, demand decreases
As price decreases, demand increases
(inverse relationship)
Define the Law of Supply
As price increases, quantity supplied increases
As price decreases, quantity supplied increases
(Direct relationship)
Equilibrium Price is
the price where the quantity of demand intersects the quantity of supply
Define elasticity of demand
the responsiveness of QD to a change in price
Define a price ceiling.
What is the maximum legal price?
Must be below equilibrium in order to be binding.
This causes a change is quantity demanded
What is Price?
This causes a change in quantity supplied
What is Price?
This happens when price is greater than equilibrium
What is a surplus?
Demand is elastic
Define a price floor.
What is a minimum legal price?
Must be above equilibrium in order to be binding.
These cause a change in demand
What is a change in determinants?
Income
Consumer Preferences
Etc.
These cause a change in supply
What is a change in Determinants?
Input costs
Technology
Taxes/Subsidies
Expectations
Number of sellers
This happens when price is less than equilibrium
what is a shortage?
What determines the elasticity of a good?
Substitutes, time, income share, whether the good is a necessity or a luxury.
Give an example of a price ceiling:
Give 3 factors that shift demand
Income
Consumer Preferences
Number of Buyers
Future Expectations
Price of Related Goods
Give 3 factors that shift supply
Technology
Input Costs
Taxes
Changes the price and the quantity
How does elasticity affect revenue?
When demand is elastic, a change in price will have a greater effect on the quantity sold.
When demand is inelastic, a change in price will not significantly affect the quantity sold.
What is a quota?
A limit on the quantity of a good that can be bought or sold.
What is the income effect?
When a change in price affects consumer's real purchasing power.
Normal Goods: When y goes up, QD goes up
(+ IED)
Inferior Goods: When y goes up, QD goes down
(-IED)
Producer Surplus is
The difference between price received and minimum acceptable price.
What happens if a shift in both supply and demand occurs?
What is deadweight loss?