PreparED Study Materials

Week 1 - Economics final

Author: Student Professor: Peter Olsen Term:

Supply and Demand (Chapter 2)

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Law of Supply

all else equal, an increase in price results in an increase in quantity supplied

Law of Demand

all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease, and vice versa.

Elasticity of Demand

a measure of the relationship between a change in the quantity demanded of a particular good and a change in its price.

Elasticity of Supply

a measure of the relationship between a change in the quantity supplied of a particular good and a change in its price.

income effect

change in consumption resulting from a change in real income

substitution effect

measures how much the higher price encourages consumers to use other goods, assuming the same level of income

complement goods

is a good with a negative cross elasticity of demand, in contrast to a substitute good. This means a good's demand is increased when the price of another good is decreased

normal goods

normal goods

what will happen to demand as income rises?

A normal good is one in which the quantity demanded at any price increases with income. This means that an increase in income will shift the demand curve for a normal good to the right. ii) Inferior Good. An inferior good is one in which the quantity demanded at any price decreases with income.

luxury good

is a good for which demand increases more than proportionally as income rises

necessity good

demand increases proportionally less than income

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