Supply and Demand

Question 1

Determinants of Demand

Answer 1

 Consumer taste
 Prices of related goods
 Complementary goods
 Substitute goods
 Consumer incomes
 Consumer expectations
 Number of buyers

Question 2

Demand Curve and Inverse Demand Curve

Answer 2

Demand Curve: Q = 1000 – 200P
Inverse Demand Curve: P = 5 - .005Q

Question 3

Supply Curve and Inverse Supply Curve

Answer 3

Supply Curve: Q = 200P – 200
Inverse Supply Curve: P = .005Q + 1

Question 4

Determinants of Supply

Answer 4

 Costs of Production (Resource or
input price)
 Taxes and subsidies
 Technology
 Prices of other goods produced
by the firm
 Producer expectations
 Natural disasters and weather
 Number of suppliers

Question 5

Price Elasticity of Demand (keep in mind it measures percentage changes along linear demand curve) and Unit elastic demand exists at midpoint D which is also the X intercept of MR

Answer 5

 Influencing factors:
 Substitutability/Necessity (2 sides of the same coin)
 Price as a Portion of Income
 Time Horizon
 In general, any factor that allows a consumer to adjust consumption
behavior leads to greater elasticity

Question 6

Total Revenue Test

Answer 6

Total Revenue = Price x Quantity
 If TR ↑ when P↓: Elastic
-Q is driving the TR
-TR moves in the same direction as Q
 If TR ↑ when P↑: Inelastic
-P is driving the TR
-TR moves in the same direction as P
 % ∆TR ≈ % ∆P + % ∆Q

Question 7

Point Formula

Answer 7

Measures E at any point along the curve
Slope from Qd function
E= 1/Slope x P/Q

Question 8

Cross-Price Elasticity of Demand

Answer 8

Edxy=Change in Percentage Qdx/ Change in Percentage Py
Positive being substitutes and negative being complements
the larger the number, the closer the subs; the more negative the stronger the comps

Question 9

Income Elasticity of Demand

Answer 9

Edi=Delta (Qd/Delta I) x (I/Qd)
Positive Elasticity: Normal Good, i.e., quantity demanded rises as income rises
positive > 1, income elastic (luxury good)
positive < 1, income inelastic
Negative Elasticity: Inferior Good, i.e., quantity demanded falls as income rises

Question 10

Demand Choke Price

Answer 10

point on Y axis for a demand curve

Question 11

Supply Choke Price

Answer 11

Point on Y axis for a supply curve

Question 12

Taxes

Answer 12

Excise Tax upsets the equilibrium and could be seen as a shift left of the supply curve
Price Elasticity impacts the incidence of the tax, i.e., who bears
the burden of the tax.
 The steeper the curve (comparing D & S), the bigger the burden of
the tax.
 D-curve relatively steep compared to S-curve?
 Buyer shoulders more of the tax.
 S-curve relatively steep compared to D-curve?
 Seller shoulders more of the tax.

Question 13

Who bears the burden

Answer 13

Share borne by Consumer = Es/(Es+|Ed|)
Share borne by Producer = |Ed|/(Es+Ed)