Microeconomics Study Notes: Supply, Demand, and Elasticity

Exam 1 Review Overview

Exam Coverage and Preparation

These notes summarize key concepts from Chapters 4, 5, and 6, focusing on supply and demand, elasticity, and government actions in markets. Students are advised to review textbook questions and online resources for comprehensive understanding.

• Exam Scope: Chapters 4, 5, and 6.

• Preparation Tips: Practice textbook questions and use online resources for additional review.

Chapter 4: Supply and Demand

Market Conditions and Shifts

Understanding the conditions for a perfectly competitive market and the factors that cause shifts in supply and demand is essential in microeconomics.

• Perfect Competition: Two conditions must be met for a market to be perfectly competitive.

• Demand Curve Shifts: A shift in the demand curve is different from a movement along the curve.

• Supply Curve Shifts: A shift in the supply curve is different from a movement along the curve.

• Graphical Representation: Changes in equilibrium price and quantity are illustrated by shifts in supply and demand curves.

Key Terms

• Equilibrium: The point where supply equals demand.

• Law of Demand: As price increases, quantity demanded decreases.

• Law of Supply: As price increases, quantity supplied increases.

Example

• If the demand for coffee increases due to a trend, the demand curve shifts right, raising both equilibrium price and quantity.

Chapter 5: Elasticity

Price Elasticity of Demand

Elasticity measures how much quantity demanded or supplied responds to changes in price or other factors.

• Definition: Price elasticity of demand quantifies the responsiveness of quantity demanded to a change in price.

• Formula:

$\text{Price Elasticity of Demand} = \frac{\%\ \text{Change in Quantity Demanded}}{\%\ \text{Change in Price}}$

• Interpretation: If elasticity > 1, demand is elastic; if elasticity < 1, demand is inelastic.

• Graphical Relationship: The flatter the demand curve, the more elastic the demand.

• Factors Affecting Elasticity: Availability of substitutes, necessity vs. luxury, proportion of income spent, and time horizon.

Income Elasticity and Cross Elasticity

• Income Elasticity: Measures how quantity demanded changes as consumer income changes.

• Cross Elasticity: Measures how quantity demanded of one good responds to price changes in another good.

$\text{Income Elasticity of Demand} = \frac{\%\ \text{Change in Quantity Demanded}}{\%\ \text{Change in Income}}$

$\text{Cross Elasticity of Demand} = \frac{\%\ \text{Change in Quantity Demanded of Good A}}{\%\ \text{Change in Price of Good B}}$

Example

• If the price of tea rises and the demand for coffee increases, the cross elasticity is positive, indicating the goods are substitutes.

Chapter 6: Government Actions in Markets

Price Controls and Market Outcomes

Government interventions such as price ceilings and price floors can affect market equilibrium and efficiency.

• Price Ceiling: A legal maximum price (e.g., rent control).

• Price Floor: A legal minimum price (e.g., minimum wage).

• Effects: Price ceilings can lead to shortages; price floors can lead to surpluses.

• Tax Incidence: The burden of a tax is shared between buyers and sellers depending on elasticity.

Example

• Rent control may make apartments more affordable but can lead to shortages and reduced quality.

HTML Table: Effects of Price Controls

Type of Control	Definition	Market Effect
Price Ceiling	Maximum legal price	Shortage, reduced quality
Price Floor	Minimum legal price	Surplus, unemployment (if wage)

Additional info:

• Students should be able to analyze supply and demand shifts graphically and mathematically.

• Understanding elasticity is crucial for predicting consumer and producer responses to price changes.

• Government interventions can have unintended consequences on market efficiency and welfare.