Supply, Demand, and Elasticity

demand schedule

a table that shows the relationship between the price of a good and the quantity demanded

Law of Demand

An increase in price leads to a decrease in quantity demanded of a good or service and a decrease in price leads to an increase in quantity demanded of a good or service - all other variables held constant.

demand curve

a graph of the relationship between the price of a good and the quantity demanded

change in quantity demanded

movement along the demand curve showing that a different quantity is purchased in response to a change in price

change in demand

A shift of the demand curve (curve shifts either right or left). Never caused by a change in price!

factors that affect demand

income, tastes and preferences, price of related goods (substitutes and complements),changes in the population/demographics, expectations about future prices

supply schedule

a table that shows the relationship between the price of a good and the quantity supplied

Law of Supply

An increase in price leads to an increase in quantity supplied of a good or service and a decrease in price leads to a decrease in quantity supplied of a good or service - all other variables held constant.

supply curve

a graph of the relationship between the price of a good and the quantity supplied

change in quantity supplied

movement along the supply curve showing that a different quantity is supplied in response to a change in price

change in supply

A shift of the supply curve (curve shifts either right or left). Never caused by a change in price!

factors that affect supply

input costs, technology, expectations about the future, number of suppliers, government policies

equilibrium

quantity demanded is equal to quantity supplied

surplus

A situation in which quantity supplied is greater than quantity demanded; occurs when the market price is greater than the equilibrium price.

four-step process for equilibrium changes

shortage

A situation in which quantity demanded is greater than quantity supplied; occurs when the market price is less than the equilibrium price.

Demand increases, what is the effect on equilibrium price and equilibrium quantity?

Compared to the original equilibrium, the new equilibrium price and equilibrium quantity will both increase.

Supply decreases, what is the effect on equilibrium price and equilibrium quantity?

Compared to the original equilibrium, the new equilibrium price will increase and equilibrium quantity will decrease.

What is price elasticity of demand?

A measure of how much the quantity demanded of a good responds to a change in the price of that good.

How is price elasticity of demand computed?

percentage change in quantity demanded divided by the percentage change in price.

elastic demand

The percentage change in quantity demanded will be greater than the percentage change in price.

elastic demand

price elasticity of demand is greater than 1

inelastic demand

demand in which changes in price have little effect on the quantity demanded

inelastic demand

price elasticity of demand is less than 1

unit elastic demand

demand is unit elastic when the percentage change in quantity demanded is equal to the percentage change in price

unit elastic demand

price elasticity of demand = 1

determinants of elasticity of demand

price elasticity of supply

a measure of how much the quantity supplied of a good responds to a change in the price of that good, computed as the percentage change in quantity supplied divided by the percentage change in price

unit elastic supply

The percentage change in quantity supplied is equal to the percentage change in price

elastic supply

the percentage change in quantity supplied will be greater than the percentage change in price

elastic supply

price elasticity of supply is greater than 1

inelastic supply

the percentage change in quantity supplied will be less than the percentage change in price

inelastic supply

price elasticity of supply is less than 1

determinants of elasticity of supply

unit elastic supply

price elasticity of supply = 1

What is the effect on total revenue when demand is elastic and the price of the good increases?

Price and total revenue move in opposite directions.

What is the effect on total revenue when demand is inelastic and the price of the good increases?

Price and total revenue move in the same direction.

What is the effect on total revenue when demand is unit elastic and the price of the good increases?

Total revenue remains constant when price changes.

Equilibrium

The point where the demand curve and the supply curve intersect.