Study Guide:

1. Understand the effect on equilibrium price and quantity with multiple

Effects on Effects on
Supply Demand
EQ price EQ
quantity
1 Increase Decrease Decrease Indetermin
ate
2 Decreas Increase Increase Indetermin
e ate
3 Increase Increase Indetermin Increase
ate
4 Decreas Decrease Indetermin Decrease
e ate
changes in supply and demand.
2. Price ceilings
a. Sets the maximum legal price a seller may charge
b. To be effective set it below Eq. P
c. Causes shortages Excess Demand
d. A price at or below the ceiling is legal

3. Price floor
a. Sets the minimum price a seller may charge
b. To be effective set it above Eq. P
c. Causes surplus Excess Supply
d. A price at or above the price floor is
legal

4. Know the Elasticity of demand graphs and corresponding coefficients

 5. What causes elasticity of demand:
a. Substitutability
b. Price relative to income
c. Luxury or necessity
d. Time
6. Know the relation between total revenue and elasticity

Type of Change Change Effect

Demand in Price in Qt. on TR
Elastic Price Qt. TR
Elastic Price Qt. TR
Inelastic Price Qt. TR
Inelastic Price Qt. TR

7. Know cross elasticity of demand coefficients and type of good

Type of Description Values of

Good Coefficien
ts
Substitutes Qt. demanded of x changes in the E xy> 0

same direction as the in price Positive

of y
Compleme Qt. demanded of x changes in the E xy< 0
nts opposite direction as the in Negative
price of y
8. Distinction between fixed and variable costs, average and marginal
costs

9. Be able to explain Law of diminishing returns and assumptions

10. Understand Economies of scale assumptions and stages
11. Monopoly
a. Set MR=MC
b. Be able to come up with MR from demand curve
c. Know what price to will be charged
12. Perfect Competition
a. Be able to understand P=MC and shutdown rule