Microeconomics Unit 2 Study Guide

Supply and Demand

Topic 2.1- Demand Topic 2.2- Supply
1. What is the law of demand? 1. What is the law of supply?
There is an Inverse relationship between P↑ Qd __↓_ There is a direct relationship between P↑ Qs _↑__
Price and quantity demanded P↓ Qd __↑_ price and quantity supplied P↓ Qs _↓__

2. Why is the market supply curve upward-sloping?

2. Why is the market demand curve downward sloping? Higher prices give profit-seeking firms an incentive to
Buyers (consumers) are willing to buy more units when produce more output
the price falls and less units when the price increases.

3. What are the five shifters of demand? 3. What are the five shifters of supply?
Tastes and preferences, number of consumers, price of Prices of resources, number of producers, technology,
related goods (Substitutes and complements), income, government action (taxes, subsidies, regulations),
future expectations expectations of future profit

Topic 2.4- Price Elasticity of Supply (PES)

4. Goods A and B are substitutes. An increase in the 1. Identify the price elasticity of supply coefficient equation
price of A will cause the demand for B to _ increase_. Percent change in quantity supplied
Percent change in price
5. Goods X and Y are complements. A decrease in the
price of X will cause the demand for Y to _increase_. 2. List 3 characteristics of goods with relatively inelastic
supply. The market has high barriers to entry (few firms),
6. Good N is a normal good. A decrease in income will
high price of alternative inputs, difficult or time consuming
cause the demand for N to _decrease_.
to produce.
7. Good R is an inferior good. A decrease in income will
cause the demand for R to _increase_.
Topic 2.3- Price Elasticity of Demand (PED) Topic 2.5- Other Elasticities
Inelastic Demand Elastic Demand 1. What is cross-price elasticity of demand (XED)? XED
shows what happens to the quantity of one product when
the price changes for a different product. It shows if two
goods are substitutes or complements.
2. Identify the XED equation.
Percent change in quantity of good A
Percent change in price of good B

3. Identify the price elasticity of demand equation. 3. What is income elasticity of demand (YED)? YED shows
Percent change in quantity demanded what happens to the quantity of a product when there is a
Percent change in price change in income. It shows if a good is normal or inferior.

Coefficient for perfectly inelastic demand = 0 4. Identify the YED equation.

Coefficient for inelastic demand = Less than 1 Percent change in quantity
Coefficient for unit elastic demand = 1 Percent change in income
Coefficient for elastic demand = Greater than 1
Coefficient for perfectly elastic demand = ∞
4. Use the total revenue test to fill in the blanks.
Inelastic Demand Elastic Demand 5. List 3 characteristics of goods with relatively inelastic
Price ↑, TR _↑__ Price ↑, TR _↓__ demand. Goods with inelastic demand are necessities,
Price ↓, TR _↓__ Price ↓, TR _↑__ have few substitutes, and have an elasticity coefficient less
than 1.

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 Microeconomics Unit 2 Study Guide
Supply and Demand
Topic 2.6- Equilibrium and Consumer and Producer Surplus
1. Define consumer surplus (CS). Difference between how much
buyers are willing to pay and the price they do pay

2. Define producer surplus (PS). Difference between the price and

how much the seller is willing to sell the product for

3. Define deadweight loss (DWL). Lost efficiency when the optimal

quantity is not being produced

4. Calculate the CS at the equilibrium price. Show your work. $125 =

($15-$10) x 50/2
5. Calculate the CS if the price was $12. Show your work. $45 =
($15-$12) x 30/2
6. Calculate the deadweight loss if the market produced only 20 units.
$90 = ($13-$7) x 30/2

Topic 2.7- Market Disequilibrium and Changes in Equilibrium

Graph #1 Graph #2 1. Draw a shortage on Graph #1. Label price
(P1), quantity supplied (Qs), and quantity
demanded (Qd). Shade in CS, PS, and DWL.
2. Draw a surplus on Graph #2. Label price
(P2), quantity supplied (Qs), and quantity
demanded (Qd). Shade in CS, PS, and DWL.
3. What is the difference between a change
in demand and a change in quantity
demanded?
A change in demand is when the entire
demand curve shifts. A change in quantity
demanded is movement along the curve.

4. Draw a demand decrease 5. Draw a demand increase 8. What is the double shift rule?
If two curves shift at the same time,
EITHER price or quantity will be
indeterminate.
9. Draw an increase in demand AND an
increase in supply. What happens to the
equilibrium price and quantity?
Price indeterminate, quantity increase

6. Draw a supply decrease 7. Draw a supply increase

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Do not use unless you have purchased an annual license
 Microeconomics Unit 2 Study Guide
Supply and Demand
Topic 2.8- Government Intervention
1. What is a price ceiling? Legal cap on prices designed to keep prices artificially 4. What is a subsidy? A
low. government payment to producers
designed to encourage them to
2. What is a price floor? Minimum legal price sellers can sell a product. produce more output.

3. A binding price ceiling must go __ below____ equilibrium and results in a

___shortage____. A binding price floor must go ___ above____ equilibrium.
Complete the following assuming the equilibrium price is $10
5. Identify the consumer surplus (CS) ABCD
6. Identify the producer surplus (PS) GHIJ
7. Identify the CS if a price ceiling is placed at $12 ABCD (no
change since the ceiling isn’t binding)
8. Identify the CS if a price floor is placed at $12 A (price floor is
at $12 is binding)
Identify the following after the tax is imposed
9. The tax per unit $4 per unit
10. CS after tax A
11. PS after tax J
12. Deadweight loss DI
13. Total tax revenue BCGH ($400)
14. Total spending by buyers BCGHJK ($1200)
15. Total revenue to sellers JK ($800)
16. Total amount of tax buyers pay BC ($200) Identify if buyers or sellers pay more of a tax in the
17. Total amount of tax sellers pay GH ($200) following situations.
18. Is the demand curve between $12 and $10 elastic, inelastic, 20. Demand is more inelastic than supply. Buyers
or unit elastic? Explain. Relatively elastic because the price pay more of the tax
decreased and the total revenue increased. 21. Demand and supply have the same elasticity.
19. Calculate the elasticity of supply coefficient as price Buyers and sellers share the tax equally
increases from $10 to $12. Show your work. +2.5 = 50%/20% 22. Supply is more inelastic than demand. Sellers
pay more of the tax
Topics 2.9- International Trade and Public Policy
Calculate the following at the equilibrium price. The graph below shows the domestic market for rice.
1. Consumer surplus ABC = $300 = ($10 x 60)/2
2. Producer surplus EFKMU = $240
3. Total surplus ABCEFKMU= $540
Calculate the following if this country buys rice from other
countries at the world price of $5. Show your work.
4. Quantity produced domestically 30 units
5. Quantity imported 60 units = (90 – 30)
6. Consumer surplus ABCEFGJKMNQRT
7. Producer surplus U
Identify the following if the government places a tariff of $1
on foreign rice. Show your work.
8. Consumer surplus ABCEFGJ
9. Tariff revenue QR = $40 ($1 x 40 units)
10. Deadweight loss NT
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Do not use unless you have purchased an annual license