Demand, Supply, and Market Equilibrium

Law of demand

As price ↓, quantity demanded ↑ (inverse relationship)

Law of Supply

As price ↑, quantity supplied ↑ (direct relationship).

What happens to total revenue when demand is elastic and price increases?

Total revenue decreases

What happens to total revenue when demand is inelastic and price increases?

Total revenue increases

∣Ed​∣>1

Demand is elastic

∣Ed​∣<1

Demand is inelastic

What causes a movement along the demand curve?

A change in a price

What causes a shift of the demand curve?

Changes in income, tastes, prices of related goods, number of buyers, or expectations.

What causes a shift of the supply curve?

Changes in input prices, technology, number of sellers, expectations, or taxes/subsidies.

Qd=Qs

market equilibrium

What happens if price is above equilibrium?

Surplus

Shortage

price is below equilibrium

What is the effect of a price ceiling below equilibrium?

shortage

What is the effect of a price floor above equilibrium?

surplus

What is it

Price elasticity of demand

Formula for which elasticity

Income elasticity of demand

Positive → normal good

Negative → inferior good.

Income elasticity 

Normal good(IED)

A good for which demand increases when consumer income rises.

Inferior good(IED)

A good for which demand decreases when consumer income increases.

Formula for which elasticity

Formula for cross-price elasticity

Positive → substitutes; Negative → complements.