Supply, Demand and Price Elasticity
Reading a market from a shift in supply or demand, and using price elasticity to predict what happens to quantity, price and total revenue.
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.
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Quiz d'entraînement
Teste-toi : résultats et explications immédiats.
1. Consumer incomes rise and the good is a normal good. What happens to its equilibrium price and quantity?
2. The cost of a key input rises for all producers. What happens in the market?
3. Demand for a good is price inelastic. The seller raises the price. What happens to total revenue?
4. Price elasticity of demand for a good is 2.5. The seller raises the price. What happens to total revenue?
5. A new technology lowers production costs across an industry. What happens to equilibrium price and quantity?
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