Module 2: Demand, Supply, and Market Equilibrium (Video Notes)

A comprehensive set of Q&A flashcards covering demand, supply, elasticity, market equilibrium, and related concepts from the notes.

What does the Law of Demand state?

There is an inverse relationship between price and quantity demanded, ceteris paribus.

How is the Demand Curve typically oriented and what does it plot?

It is downward-sloping, plotting quantity demanded (horizontal axis) versus price (vertical axis).

What is the difference between Movement Along the Demand Curve and a Shift in Demand?

Movement Along occurs when the price changes; a Shift occurs when a non-price determinant changes, shifting the whole demand curve to the left or right.

Name several Non-Price Determinants of Demand.

Changes in income, tastes and preferences, prices of related goods (substitutes and complements), expectations, and population.

What is the Substitution Effect?

If the price of a substitute rises, demand for the original good may increase (e.g., tea to coffee).

What is a Complement in demand analysis?

A good that is often consumed with another; if its price rises, demand for the related good falls (e.g., coffee and creamer).

What is the standard Demand Function form discussed, and what do its parameters represent?

Qd = a - bP + c; a is the intercept (Qd when price is $0), b is the change in quantity demanded per $1 price change, and c captures non-price determinant effects.

What does the parameter b represent in the demand function Qd = a - bP + c?

The slope parameter: the change in quantity demanded caused by a $1 change in price.

What does the parameter c represent in the demand function Qd = a - bP + c?

The effect of a non-price determinant; c > 0 shifts demand right (increases at all prices), c < 0 shifts left (decreases at all prices).

What is Price Elasticity of Demand (PED) and how is it calculated?

PED = (% Change in Quantity Demanded) / (% Change in Price); measures how responsive quantity demanded is to price changes.

How do we interpret PED values?

PED > 1 is elastic, PED < 1 is inelastic, PED = 1 is unit elastic.

What is a key revenue implication when demand is elastic?

Lowering prices by a small amount increases total revenue.

What is Cross-Price Elasticity (XED) and how is it interpreted?

XED = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B); XED > 0 indicates substitutes, XED < 0 indicates complements.

What is Income Elasticity of Demand (YED) and how is it interpreted?

YED = (% Change in Quantity Demanded) / (% Change in Income); YED > 1 luxury, 0 < YED < 1 normal, YED < 0 inferior.

How are demand estimates often produced using trendlines in Excel?

Trendlines in scatterplots model the relationship between price (independent variable) and quantity demanded (dependent variable) to help estimate demand.

What does Supply describe and what does the Law of Supply state?

Supply describes the quantity producers are willing to offer at different prices; the Law of Supply states there is a positive relationship between price and quantity supplied.

What is the Supply Curve and how is it oriented?

An upward-sloping curve showing quantity supplied (horizontal) versus price (vertical); higher prices lead to greater quantities supplied.

Differentiate Movement Along the Supply Curve from a Shift in the Supply Curve.

Movement Along occurs when the price changes and producers move to a new point on the same curve; a Shift occurs when a non-price determinant changes, shifting the entire curve left or right.

List Non-Price Determinants of Supply.

Input costs, technology, natural conditions, number of sellers, government policies (taxes/subsidies), and expectations.

What is the standard Supply Function form and what do its components mean?

Qs = r + sP + c; r is the intercept (quantity supplied at price $0), s is the slope (change in quantity per $1 price change), c captures non-price determinants.

What does s represent in the supply function Qs = r + sP + c?

The slope: change in quantity supplied per $1 change in price.

What is the effect of the non-price determinant c in the supply function?

If c > 0, supply increases at every price (rightward shift); if c < 0, supply decreases at every price (leftward shift).

What is Market Equilibrium?

The intersection of the demand and supply curves where quantity demanded equals quantity supplied, determining the equilibrium price and quantity.

What are Excess Supply (Surplus) and Excess Demand (Shortage)?

Surplus occurs when price is above equilibrium, causing quantity supplied to exceed quantity demanded; Shortage occurs when price is below equilibrium, causing quantity demanded to exceed quantity supplied.

How do shifts in demand or supply affect equilibrium price and quantity?

Increase in demand raises both equilibrium price and quantity; decrease in demand lowers both. Increase in supply lowers price and raises quantity; decrease in supply raises price and lowers quantity.

What is the impact of price controls on equilibrium?

Government-imposed price controls can create persistent surpluses or shortages, distorting market equilibrium.

What is Consumer Surplus and how is it calculated?

The benefit to buyers from paying less than they are willing to pay; CS = (1/2) × Base × Height, where Base = equilibrium quantity and Height = (maximum willingness to pay − equilibrium price).

What is Producer Surplus and how is it calculated?

The extra benefit to sellers from receiving more than their minimum acceptable price; PS = (1/2) × Base × Height, where Base = equilibrium quantity and Height = (equilibrium price − minimum acceptable price).