Supply and Demand Flashcards
Fundamental Law of Demand
definition
B5-28
- -P inc, QD dec
- -downward sloping curve
- -price inversely related to quantity demanded
Substitution Effect
definition
B5-28
consumers purchase more (less) of a good when its price falls (rises) in relation to the price of other goods
Income Effect
definition
B5-29
as prices are lowered with income remaining constant, people will purchase more of all of the lower-priced products
Factors that shift demand curves (6)
B5-29
“WRITEN” mnemonic
Factors that shift demand curves (6)
“WRITEN” mnemonic
B5-29
Changes in:
W-- Wealth R-- price Related goods I-- consumer Income T-- consumer Tastes E-- consumer Expectations N-- Number of buyers
Fundamental Law of Supply
definition
B5-30
- -P inc, QS inc
- upward sloping
- -price and quantity are positively related
Factors that shift supply curves (5)
B5-31
“E COST” mnemonic
Factors that shift supply curves (5)
“E COST” mnemonic
B5-31
Changes in:
E– price Expectations
C– production Costs
O– price or demand for Other goods
S– Subsidies or taxes
T– Technology
Price Ceiling
definition
B5-32
Price set below the equilibrium price
–results in a shortage
Price Floor
definition
B5-32
Price set above the equilibrium price
–results in a surplus
Effect of Changes in Demand on Equilibrium
B5-33
Increase demand (shift right) --P inc, Q inc
Decrease demand (shift left) --P dec, Q dec
Effect of Changes in Supply on Equilibrium
B5-33
Increase supply (shift right) --P dec, Q inc
Decrease supply (shift left) --P inc, Q dec
Price Elasticity of Demand
What is the value?
B5-36
Price Elastic: > 1
Price Inelastic: < 1
Unit Elastic: = 1
Price Elasticity of Demand
What is the impact of a Price Increase on Total Revenue?
B5-36
Price Elastic: >1; Total Rev dec
Price Inelastic: <1;Total Rev inc
Unit Elastic: =1; Total Rev unchanged
Price Elasticity of Demand
What is the impact of a Price Decrease on Total Revenue?
B5-36
Price Elastic: >1; Total Rev inc
Price Inelastic: <1;Total Rev dec
Unit Elastic: =1; Total Rev unchanged
