BVFD

Question 1

Intercept

Answer 1

Height of line when variable on horizontal axis (e.g. quantity) = 0

Question 2

Slope

Answer 2

Measures steepness of line

Question 3

Law of demand

Answer 3

As price of a good increases, quantity demanded of that good decreases (holding other things equal)

Question 4

Substitution effect when price increases

Answer 4

Consumer substitutes more expensive good with cheaper alternatives -> more expensive good’s quantity demanded decreases

Question 5

Income effect when price increases

Answer 5

Consumers worse off because real income falls -> can’t afford same amount of goods before surge in price

Question 6

Law of supply

Answer 6

Positive relationship between price and quantity supplied of good

Question 7

Linear demand function

Answer 7

QD = a - bP
where
QD: quantity demanded
a and b: positive constants
P: price

Question 8

Linear supply function

Answer 8

QS = c + dP
where
QS: quantity supplied
c and d: positive constants
P: price

Question 9

Market equilibrium price

Answer 9

QD = QS
a - b.P = c + dP
dP + b.P = a - c
P(b + d) = a - c
P* = (a-c)/(b+d)

Question 10

Market equilibrium quantity

Answer 10

Substitute P* into QD
QD = a - b.((a-c)/(b+d))
Q* = b.c + d.a / (b+d)

Question 11

Cause of movement along demand curve

Answer 11

Price of good changes holding other things equal (inversely)

Question 12

Cause of demand curve shift

Answer 12

1. Price of related goods
2. Income
3. Tastes and expectations

Question 13

Cause of movement along supply curve

Answer 13

Price of good changes holding other things equal (positively)

Question 14

Cause of supply curve shift

Answer 14

1. Technology
2. Price of inputs
3. Government intervention/regulation
4. Expectations