Review Guide: Test on Supply and Demand
1.1 Competitive Markets: SUPPLY AND DEMAND:
Price Mechanism:
How does this mechanism affect seller’s decisions?

Shortages cause:

Surpluses cause:
DEMAND
Law of Demand
Indirect relationship between price and quantity demanded
Reasons for down-sloping Demand Curve (Why people purchase more at lower prices)
# substitute effect
# income effect
Law of diminishing marginal utility (Donuts:
Demand Schedule:
Movement along the curve/ changes in quantity demanded
Normal Good vs. Inferior Good:
Draw a Demand Curve:
Changes in Demand (non-price Determinants)
Exceptions to the law of demand:
1.
2.
3.
SUPPLY
Law of Supply
-direct relationship
Supply Schedule
Movement along the curve/ changes in quantity supplied
Draw a supply curve here:
Changes in Supply (non-price determinants):
Market Equilibrium/ Market Clearing
Surpluses and Shortages
Changes in quantity demanded/supplied (movement along curve)
Surplus
Shortage
1.3 Government Intervention: Price controls (chapter 5)
Price Ceilings/Maximum Price Controls:
What does it cause?
**Concept of excess demand in relation the price ceiling!!**
Graphically:
How does the government try and maintain higher price levels:
Ways to increase supply:
Consequences:
Price Floors/Minimum Price Controls
What does it cause?
**Concept of excess supply in relation the price floor!!**
Graphically:
How does the government try and maintain higher price levels:

Increase demand:
Buy up excess

Sell to foreign entities or give away as aid

Destroy stocks

Decrease Supply:
Pay farmers to allow land to lay fallow

Destroy stocks
Resource Allocation (chapter3)

Price as a signaling function

Price as a rationing Function
Market efficiency (chapter 3)
Consumer Surplus
Producer Surplus
Allocative Efficiency
1.2 Price elasticity of demand (Chapter 4)
 Price Inelastic demand
Definition:
Determinants:
Slope:
Draw an example here:
 Price Elastic demand
Definition:
Determinants:
Slope:
Draw an example here:
1.1 Linear Functions Schedules and Graphs (chapter 2 & 3)
Explain a demand function in the form Qd=a-bP
Plot a demand curve from the linear function
Identify the slope of the demand curve
Outline why if there is a change in a, there will be a shift in demand
Explain a supply function in the form Qs=c-dP
Plot a supply curve from the linear function
Identify the slope of the supply curve
Outline why if there is a change in d, there will be a shift in supply
Indirect Taxes: 1.3 Government Intervention (Chapter 5)
Specific Tax (S + tax)
Draw and show impact on market outcomes:
 Producer revenue
 Government revenue
 Tax burden on consumers
 Tax burden on producers
Ad Valorem tax (S1 + tax)
Draw and show impact on market outcomes:
 Producer revenue
 Government revenue
 Tax burden on consumers
 Tax burden on producers
1.3 Government Intervention: Subsidies (Chapter 5)