Cheat Sheet
5 sections
•
20 key points
1
Law of Demand
Inverse relationship between price and quantity demanded (ceteris paribus).
As price increases, quantity demanded decreases; as price decreases, quantity demanded increases.
Results in a downward-sloping demand curve.
Caused by the income effect and the substitution effect.
2
Law of Supply
Direct relationship between price and quantity supplied (ceteris paribus).
As price increases, quantity supplied increases; as price decreases, quantity supplied decreases.
Results in an upward-sloping supply curve.
Producers are incentivized to supply more at higher prices to maximize profit.
3
Market Equilibrium
The point where quantity demanded equals quantity supplied.
The intersection of the demand and supply curves.
Equilibrium Price: The price at which the market clears (no surplus or shortage).
Equilibrium Quantity: The quantity traded at the equilibrium price.
4
Elasticity
Price Elasticity of Demand/Supply: Measures responsiveness of quantity to price changes.
Elastic: % change in quantity > % change in price (e.g., luxury goods).
Inelastic: % change in quantity < % change in price (e.g., necessities).
Unit Elastic: % change in quantity = % change in price.
5
Market Shifts & Price Controls
Demand Curve Shifts: Changes in income, tastes, expectations, price of related goods, number of buyers.
Supply Curve Shifts: Changes in input prices, technology, expectations, number of sellers, taxes/subsidies.
Price Floor: Minimum legal price (e.g., minimum wage) – can create surpluses.
Price Ceiling: Maximum legal price (e.g., rent control) – can create shortages.
Sample Flashcards
Card 1 of 6
Question
What type of curve illustrates the Law of Demand?
Answer
Downward-sloping
Click the card to flip
Quick Quiz
1. According to the Law of Demand, if the price of a smartphone decreases, what will most likely happen?
2. If the equilibrium price for a product is $50, and the government imposes a price floor of $60, what is the most likely outcome?
3. Which of the following would cause a leftward shift in the demand curve for coffee?
4. If the absolute value of the price elasticity of demand for a product is 0.5, the demand is considered:
5. Market equilibrium is achieved when:
Frequently Asked Questions
What is the Law of Demand?
The Law of Demand states that, all else being equal, as the price of a good or service increases, the quantity demanded decreases, and vice-versa. This inverse relationship is typically represented by a downward-sloping demand curve.
How is market equilibrium determined?
Market equilibrium occurs at the price and quantity where the quantity supplied equals the quantity demanded. At this point, there is no surplus or shortage in the market, and the market is stable.
What is price elasticity of demand?
Price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. If demand is elastic, consumers are very responsive to price changes; if it's inelastic, they are less responsive.
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