Supply, Demand and Price Elasticity

Microeconomics starts with one market and one question: when something changes, which curve moves, in which direction, and what happens to price and quantity. AP Microeconomics rewards students who answer this as a chain rather than a definition.

Supply and demand shifts

A demand shift comes from income, tastes, the price of related goods, or expectations. A supply shift comes from input costs, technology, or the number of sellers.

• Demand rises: the demand curve shifts right, price rises, quantity rises.
• Supply rises: the supply curve shifts right, price falls, quantity rises.

Price elasticity

Price elasticity of demand measures how much quantity responds to a price change.

If demand is inelastic (elasticity below 1), a price increase raises total revenue, because quantity falls by a smaller percentage than price rises. If demand is elastic (above 1), the same price increase lowers total revenue.

Worked point

A bad harvest reduces supply of a staple food. Supply shifts left, so price rises and quantity falls. Because staple food demand is inelastic, total spending on it rises even though people buy a little less.

Exam tip

Label the axes, shift the correct curve, mark the new equilibrium, and then answer the elasticity question with a number, not a word.