Supply and demand, elasticity, market structures, and cost curve concepts and formulas.
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- What does the law of demand state?
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As the price of a good decreases, the quantity demanded increases, all else equal.- What does the law of supply state?
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As the price of a good increases, the quantity supplied increases, all else equal.- Define market equilibrium.
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The point where quantity demanded equals quantity supplied at a single price.- Distinguish between a movement along the demand curve and a shift of the demand curve.
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A movement along the curve is caused by a price change; a shift is caused by a change in other factors (income, preferences, prices of related goods).- List three determinants of supply.
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Input prices, technology, and seller expectations (or number of sellers).- Define a shortage in a market.
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The situation when quantity demanded exceeds quantity supplied at a given price.- Define a surplus in a market.
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The situation when quantity supplied exceeds quantity demanded at a given price.- What is the economic effect of a price ceiling below equilibrium?
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It creates a shortage, as the quantity demanded exceeds the quantity supplied at the ceiling price.- What is the economic effect of a price floor above equilibrium?
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It creates a surplus, as the quantity supplied exceeds the quantity demanded at the floor price.- Define consumer surplus.
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The difference between what consumers are willing to pay for a good and what they actually pay.- What is the formula for price elasticity of demand?
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PED = (percentage change in quantity demanded) / (percentage change in price)- What does it mean if the price elasticity of demand is greater than 1 in absolute value?
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Demand is elastic, meaning quantity demanded responds strongly to price changes.- What does it mean if the price elasticity of demand is less than 1 in absolute value?
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Demand is inelastic, meaning quantity demanded does not respond much to price changes.- Define income elasticity of demand.
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The percentage change in quantity demanded divided by the percentage change in income.- Define cross-price elasticity of demand.
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The percentage change in quantity demanded of one good divided by the percentage change in price of another good.
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