Economics Unit 2 Quiz Study Guide

Law of Demand

as price increases, the quantity demanded decreases and as price decreases, the quantity demanded increases

Law of Supply

as prices increase, the quantity supplied will increase and as prices decrease, the quantity supplied will decrease

Elasticity

responsiveness

If an item has elastic demand, what happens when the price changes?

There will be a significant change in quantity demanded when there is a change in price.

If an item has inelastic demand, what happens when the price changes?

There will be a minimal change in quantity demanded when there is a change in price.

How do you determine the elasticity of supply of an item?

determined by how responsive the change in quantity supplied is when there is a change in price. (look at a graph)

If an item has an elastic supply, what happens when the price changes?

There will be a significant change in quantity supplied when the price changes.

If an item has an inelastic supply, what happens when the price changes?

There will be minimal change in quantity supplied when the price changes

Equilibrium price

price where quantity supplied equals quantity demanded

Substitute Effect on Demand

if the price of one good increases, the quantity demanded decreases and the demand for its substitute increases.

Complementary Effect on Demand

if the price of one good increases, the quantity demanded decreases and the demand for its complement also decreases.

7 Non-Price Factors of Supply (Determinants)

technology/productivity, cost of inputs/factors of production, number of sellers, producer expectations, government, prices of related goods, and weather/natural disasters.

Surplus

quantity supplied is greater than the quantity demanded. Prices drop during this event

Shortage

quantity demanded is greater than quantity supplied. Prices increase during this event

Price Floor

establishes a minimum price for a particular good. An example is the Federal Minimum Wage.

Price Ceiling

maximum price for a particular good. An example of this is rent-controlled/stabilized apartments.

Reasons for a change in Equilibrium

shifts in the supply and demand curve.

The 2 Income Effects on Demand

Inferior goods & Normal goods

Inferior Goods

demand decreases when income increases, demand increases when income decreases

Normal Goods

demand increases when income increases, demand decreases when income decreases