Unit Two: Supply & Demand Name: ________________________________________
Review Guide Date: _________________________
Instructions: Complete each section to review the topics in preparation for the unit two test. Note:
topics are numbered according to the AP numbering system.
2.1 & 2.2 Supply & Demand Demand Supply
a. The Law of Demand: b. The Law of Supply:
1. In the chart to the right, fill in the
missing blanks with the correct When P QD _________ When P QS _________
arrow ( or ) based on what When P QD _________ When P QS _________
would result from the indicated
change. c. Substitutes d. Complements
P of A Demand for B ______ P of A Demand for B ______
2. What three factors help explain
the slope of the demand curve? P of A Demand for B ______ P of A Demand for B ______
_______________________________________ e. Normal Goods: f. Inferior Goods:
_______________________________________ Income Demand __________ Income Demand __________
_______________________________________ Income Demand __________ Income Demand __________
3. What are the 7 shifters of demand?
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4. Although there are many determinants of supply, in general, the shifters can be drilled down into
what three factors?
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5. On the axis to the right, draw a correctly labelled demand and supply curve for lamps, including the
equilibrium price (Pe), and the equilibrium quantity (Qe).
a. Assume there is a sudden increase in the price of “smart
lights” (a substitute for lamps). Shift the appropriate
curve and label the new equilibrium price (P1) and
quantity (Q1).
b. In the market for lamps, does this change create a higher
or lower price?
__________________________________________________________
c. At first, will the chnage you identified cause a surplus or
shortage of lamps?
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6. Use the graphs below to show the designated type of market change. Make sure the label the resulting
change in equilibrium price and quantity.
a. Demand Increase b. Demand Decrease c. Supply Increase d. Supply Decrease
7. Draw the following market
conditions →
8. Fill in the blanks for the market
conditions listed with=, <, or >.
2.3 & 2.4 Price Elasticities of Demand and Supply
9. What is the formula for calculating each of the following:
a. Price Elasticity of Demand b. Price Elasticity of Supply
10. Fill in the blanks below to show the relationship between elasticity and total revenue:
a. When price increases on an elastic good, total revenue will __________________________________________.
b. When price increases on an inelastic good, total revenue will ________________________________________.
11. Fill in the blanks below to explain how magnitude of price elasticity is interpreted:
Elastic goods have an Ed ___________ 1 while inelastic goods have an Ed ___________ 1. Unit elastic has Ed __________ 1.
12. The demand curve for shoes is downward sloping, and the absolute value of the price elasticity of
demand is 2. If the price of shoes increases by 3%, what will happen to the quantity of shoes
demanded?
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2.5 Other Elasticities
13. What is the formula for calculating each of the following:
a. Income Elasticity of Demand b. Cross-Price Elasticity of Demand
14. Fill in the blanks with either “positive” or “negative” to show how each of the named magnitudes of
elasticity is interpreted.
a. Substitute goods have a cross-price elasticity that is ___________________________________________________
b. Complement goods have a cross-price elasticity that is ________________________________________________
c. Normal goods have an income elasticity that is _________________________________________________________
d. Inferior goods have an income elasticity that is _________________________________________________________
15. Consider the following: a 10% percent increase in the price of Good X results in a 20% decrease in
the quantity demanded of Good Y. Use this information to answer the following questions:
a. What is the magnitude of cross-price elasticity for these two goods?
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b. What is the relationship between these two goods? ____________________________________________________
2.6 Market Equilibrium
16. On the graph below, shade and label the areas of Consumer Surplus and Producer Surplus.
17. Identify if each statement below is true or false:
a. A market operating at equilibrium is allocatively
efficient. ______________________________________________
b. At equilibrium, total economic surplus is
maximized. __________________________________________
18. Using the labeling on the graph, how would you
calculate the producer surplus?
____________________________________________________
19. Which letters on the graph represent the area of
total economic surplus? (list all that apply)
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Putting it All Together
Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled
diagram must have all axes and curves clearly labeled and must show directional changes. If the question
prompts you to “Calculate,” you must show how you arrived at your final answer.
20. Consider this: In the local market for Good
X, there are four individual buyers: Emily,
Wu, Omar, and Fernanda. The quantities
that each individual buyer would be willing
and able to purchase at different prices are
included in the table to the right.
a. The local market for Good X has a
perfectly elastic supply. In the space
provided, draw a correctly labeled
graph for the local market for Good X with a market equilibrium price of $5. Label the
equilibrium price as $5 and label the equilibrium quantity for the market with a specific value
based on the data provided in the table.
b. Assume the costs of production increase,
which causes the price of Good X to increase
from $5 to $7.
i. Calculate the price elasticity of demand for
Good X as the price increases from $5 to $7.
Show your work.
ii. Identify whether the demand for Good X is
elastic, inelastic, or unit elastic in that range
of prices.
__________________________________________________
c. Now imagine another good, Good P, whose magnitude of cross-price elasticity with regard to
Good X is -3. Then, suppose there is a significant price increase for Good P. What would be the
resulting effect on the market for Good X? Explain.
d. Draw the market effect you identified in part (c) on your original graph from part (a) showing
the impact on equilibrium price and equilibrium quantity.