Eco

No need to panic—you're definitely not cooked! Here is your complete study guide based directly on the questions and concepts from your review test screenshots.

1. Core Vocabulary Matching

Vocabulary Term

Definition / Matching Characteristic

Substitute

Margarine and Butter (goods used in place of one another)

Diminishing Marginal Utility

The phenomenon that each additional unit of gain leads to an ever-smaller increase in subjective value

Elastic

Concept used to measure the change in the aggregate quantity demanded of a good/service in relation to price movements

Demand

Consumers (the desire and willingness to buy)

Supply

Producers (the willingness to produce and sell)

Equilibrium

A condition or state in which economic forces are balanced

2. Essential Rules & Laws

  • Law of Demand: Inverse relationship between price and quantity demanded.

    • As Price \uparrow, Quantity Demanded \downarrow

    • As Price \downarrow, Quantity Demanded \uparrow

    • Note on review test: Distinguish between "Demand" (the entire curve) and "Quantity Demanded" (movement along the curve).

  • Law of Supply: Direct relationship between price and quantity supplied.

    • Producers will produce/sell more at higher prices than at lower prices.

  • Market Exchanges: Free market transactions are Voluntary Exchanges.

3. Elasticity Breakdown

  • Elastic Demand: % Change in Quantity Demanded is GREATER than % Change in Price (e.g., 10\% price increase leads to a 15\% drop in sales \rightarrow Elastic).

  • Determinants of Elasticity (Factors that influence elasticity):

    • Availability of substitutes

    • Whether the product is a luxury or a necessity

    • Proportion/amount of income spent on the good

    • Time elapsed since the price change

  • NOT a determinant: Simple existence of utility, or basic shifts in overall income.

4. Determinants of Demand (Shifters of Demand Curve)

A change in Price only moves along the curve. The following factors shift the entire Demand curve:

  • Changes in Incomes

  • Changes in Tastes and Preferences

  • Increase in Population (Number of Buyers)

  • Price changes of related goods (Substitute Goods or Complementary Goods)

  • Changes in expectations about future prices/conditions

Review Question Check: A reduction in the price of cattle feed affects supply/production costs, so it does NOT shift the demand curve for beef.

5. Determinants of Supply (Shifters of Supply Curve)

  • Changes in production costs

  • Technological Progress (makes production cheaper)

  • Increase in the number of sellers/suppliers

  • Government Regulations and Government Taxes

Need a quick practice question or further breakdown on any of these?