Micro Unit 2 Flashcards
Law of Demand
As price goes up, quantity demanded goes down; inverse relationship between price and quantity.
Law of Supply
As price goes up, quantity supplied goes up; direct relationship between price and quantity.
What is the difference between change in quantity demanded and change in demand?
The only thing that can result in a change in quantity demanded is price, whereas a change in demand refers to the five shifters of demand.
5 shifters of demand
- Tastes and preferences
- Change in prices of related goods
- Change in income (disposable income)
- Future expectations
- Changes in population
5 shifters of supply
- Price and quantity of resources
- # of sellers
- technology
- actions of the government
- expectations of future profits
Relationship between price and demand for substitute goods
Direct relationship
ex. if the price of coke goes up, the demand for pepsi will go up because people will buy the cheaper good.
Relationship between price and demand for compliment goods
Inverse relationship
ex. If the price of hot dogs increases, the demand for hot dog buns will decrease.
Relationship between income and demand for normal goods
Direct relationship
ex. as peoples incomes increase, the demand for name brand products like Dr. Pepper will increase.
Relationship between income and demand for inferior goods
Inverse relationship
ex. As incomes decrease, the demand for inferior goods like dr. thunder will increase.
Price ceiling
A maximum amount that a seller is allowed to charge for a given product. In order to have an effect, the price ceiling must be placed below the equilibrium price.
Price floor
the minimum amount sellers can charge for a product. Binding price floors go above equilibrium and result in a surplus.
Elasticity
shows how sensitive a quantity is to a change in price
Inelastic Demand
Quantity demanded is insensitive to a change in price.
Characteristics include:
- few substitutes
- necessities
- elasticity coefficient is less than one
- Demand curve is STEEPER than normal
Elastic Demand
Quantity demanded is sensitive to a change in price.
Characteristics include:
- many substitutes
- luxuries
- elasticity coefficient greater than one
- demand curve is FLATTER than normal
Total revenue test
For inelastic demand, there is a direct relationship between price and total revenue.
For elastic demand, there is an indirect relationship between price and total revenue.