Topics in Demand and Supply Analysis

Question 1

3 topics (demand side)

Answer 1

Elasticities
Substitution and income effects
Normal and inferior goods

Question 2

Law of demand

Answer 2

as the price of a good rises, buyers will choose to buy less of it, and as its price falls, they buy more

Question 3

Demand function

Answer 3

The quantity demanded of good X is a function of:

1) price of good X
2) consumers’ income
3)price of good Y

Question 4

Demand function equation

Answer 4

Q= f(Px, I, Py)

Question 5

Own price

Answer 5

the reference is to the price of a good itself!!! and not the price of some other good

Question 6

Inverse demand function

Question 7

When is demand elastic/ inelastic

Answer 7

x>1 = elastic
x<1= inelastic
-1= unit elastic

Question 8

Positive income elasticity

Answer 8

^ income, ^ quantity demanded

Question 9

Negative income elasticity

Answer 9

^ income, ppl buy less of good
v income, ppl buy more of a good

Question 10

Normal goods

Answer 10

goods with positive income elasticity

Question 11

Inferior goods

Answer 11

goods with negative income elasticity (rice, potatoes)

Question 12

Normal goods– What happens to demand curve if there is a rise in income

Answer 12

Demand curve shifts upward and to the right

Question 13

Inferior good– What happens to demand curve if there is a rise in income

Answer 13

Demand curve shifts downward and to the left

Question 14

What does it mean if the cross-price elasticity of 2 goods is positive

Answer 14

They are substitutes (pepsi and coke)

Question 15

What does it mean if the cross-price elasticity of 2 goods is NEGATIVE

Answer 15

They are complements (gas and cars, houses and furniture)