econ ch 2 basics of supply and demand

• What does the supply curve show?

  Quantity producers are willing to sell
• How is the supply curve characterized?

  It is upward-sloping
• What does the demand curve show?

  Quantity consumers are willing to buy
• How is the demand curve characterized?

  It is downward-sloping
• What is a change in quantity supplied?

  Movement along the supply curve due to price change
• What causes a change in supply?

  Changes in production costs, technology, etc.
• What is a change in quantity demanded?

  Movement along the demand curve due to price change
• What causes a change in demand?

  Income, tastes, or prices of other goods
• What are substitute goods?

  A rise in the price of one increases demand for the other
• What are complement goods?

  A rise in the price of one decreases demand for the other
• What is the market mechanism?

  Process through which supply and demand interact
• What is the equilibrium price?

  Price at which quantity demanded equals quantity supplied
• What is a surplus?

  Quantity supplied > quantity demanded at a price
• What is a shortage?

  Quantity demanded > quantity supplied at a price
• What happens during simultaneous shifts in supply and demand?

  • Effect on price/quantity depends on direction
  • Magnitude of shifts in supply and demand matters
• What occurs with a rightward shift of demand or supply?

  Increases quantity; prices depend on shifts' magnitude
• What is elasticity in economics?

  % change in one variable due to a 1% change in another
• What is price elasticity of demand?

  % change in quantity demanded / % change in price
• What is price elasticity of supply?

  % change in quantity supplied / % change in price
• What is income elasticity of demand?

  % change in quantity demanded / % change in income
• What is cross-price elasticity?

  % change in demand for good A / % change in price of good B
• What is point elasticity?

  Elasticity at a specific point on the curve
• What is arc elasticity?

  Elasticity over a range of prices
• What characterizes infinitely elastic demand?

  Horizontal demand curve; small price change = huge quantity change
• What characterizes completely inelastic demand?

  Vertical demand curve; quantity doesn't change with price
• How does demand elasticity differ in the short run vs. long run?

  • Demand is more elastic in the long run
  • Example: People buy fuel-efficient cars over time
• How does supply elasticity differ in the short run vs. long run?

  • Firms can adjust more in the long run
  • Long-run supply is more elastic
• How can supply and demand equations be used?

  • Constructed using elasticity values and equilibrium data
  • Helpful for policy analysis and forecasting
• What is a price ceiling?

  Max legal price, e.g., rent control
• What can a price ceiling create?

  Shortages
• What is a price floor?

  Min legal price, e.g., minimum wage
• What can a price floor create?

  Surpluses
• What caused shortages in natural gas?

  Price ceilings due to excess demand