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•What is the law of demand?
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as Price of Good X increases quantity demanded of Good X will decrease, and vice versa
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• What is the difference between a change in quantity demanded and a change in demand? How are these demonstrated graphically?
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• Be familiar with the factors of demand and how these are manifest graphically. Know the difference between normal and inferior goods. Know how the change of in the price of related good impacts demand (i.e.
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substitutes and complements), EX. Change in the Price of peaches (a good). Price is on vertical axis. The price of peaches changes, the demand curve will not shift. The price on the vertical axis allows us to analysis the change without a shift. Anything that is not on that vertical axis (price) income, price of a substitute, price of a complement, technology, etc. will cause a shift in demand.
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• Know how to interpret an implicit or explicit demand function and how to solve for price and quantity
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• What is the supply curve and generally what is the relationship between price and quantity?
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• What is the difference between a change in quantity supply and a change in supply and how are these demonstrated graphically?
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• Be familiar with the factors of supply and how these are manifest graphically. Know how changes in costs and technology affect the supply curve
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• Know how to determine economic equilibrium using supply and demand equations or graphs. If the price is above or below equili
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• Know how the market mechanism leads to equilibrium when prices lead to excess supply or excess demand.
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The Demand Curve represents a mathematical Demand Function: Qd = D (p, pt, Y) where Demand for avocados (in millions of pounds per month) is a function of P (price of avocados), Pt (price of tomatoes), and Y (income):Estimated Demand Function: Qd = 104 - 40p + 20pt + .01Y
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Parameters for p
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pt and Y reflect empirical evidence. Value 104 captures all other factors. In order to plot a unique demand curve we must solve for everything except Qd and P.
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If we hold pt and Y constant at $0.80 and $4
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000, we get: Q = 160 - 40p
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• Know the difference between the demand (supply) function and the inverse demand (supply) function
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• What is the impact of price controls (price ceilings and price floors)? When are these binding?
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If left to its own and depending on the level of competition in the market, prices will move towards equilibriumFor political or reasons politician often put in place price controls
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o Price ceiling is a maximum price of a good (rent control
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price gouging laws-N95 face masks)
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o Price floor is a minimum price for a good (price supports on agriculture
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minimum wage)
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