Economics 4e HomeEconomics In The NewsSite MapGlossaryContact UsSmartWork
Chapter123456789101112131415161718192021222324252627282930313233343536373839

Chapter Review Chapter 4: Using Demand and Supply

  1. The price elasticity of demand describes how sensitive the quantity demanded of a good is to changes in the price of the good. When demand is inelastic, an increase in the price has little effect on the quantity demanded and the demand curve is steep; when demand is elastic, an increase in the price has a large effect on the quantity demanded and the curve is flat.
  2. The price elasticity of supply describes how sensitive the quantity supplied of a good is to changes in the price of the good. If price changes do not induce much change in supply, the supply curve is very steep and is said to be inelastic. If the supply curve is very flat, indicating that price changes cause large changes in supply, supply is said to be elastic.
  3. The extent to which a shift in the supply curve affects price or affects quantity depends on the shape of the demand curve. The more elastic the demand, the more a given shift in the supply curve will be reflected in changes in equilibrium quantities and the less it will be reflected in changes in equilibrium prices. The more inelastic the demand, the more a given shift in the supply curve will be reflected in changes in equilibrium prices and the less it will be reflected in changes in equilibrium quantities.
  4. Likewise, the extent to which a shift in the demand curve affects price or affects quantity depends on the shape of the supply curve.
  5. Demand and supply curves are likely to be more elastic in the long run than in the short run. Therefore a shift in the demand or supply curve is likely to have a larger price effect in the short run and a larger quantity effect in the long run.
  6. Elasticities can be used to predict how much consumer prices will rise when a tax is imposed on a good. If the demand curve for a good is very inelastic, consumers in effect have to pay the tax. If the demand curve is very elastic, the quantities produced and the price received by producers are likely to decline considerably.
  7. Government regulations may prevent a market from moving toward its equilibrium price, leading to shortages or surpluses. Price ceilings lead to excess demand. Price floors lead to excess supply.
W.W. Norton and Company College Home Page