Microeconomics 101 — Supply, Demand & Elasticity — 3-topic bundle

Market Equilibrium

                <p>The price of a good is determined where the <b>Supply Curve</b> meets the <b>Demand Curve</b>.</p>

Definitions:

                <ul>
                    <li><b>Law of Demand:</b> As price goes up, quantity demanded goes down (Inverse relationship).</li>
                    <li><b>Law of Supply:</b> As price goes up, quantity supplied goes up (Direct relationship).</li>
                </ul>
                <p><b>Exam Question:</b> What happens to the equilibrium price if consumer income rises? (Hint: Demand curve shifts right, Price increases).</p>

Understanding Elasticity

                <p>PED measures how sensitive consumers are to a price change. Formula: <code>% Change in QD / % Change in Price</code>.</p>
                <ul>
                    <li><b>Elastic (>1):</b> Consumers are sensitive (e.g., Luxury cars). A small price hike drops sales significantly.</li>
                    <li><b>Inelastic (<1):</b> Consumers don't care much (e.g., Insulin, Petrol). You buy it regardless of price.</li>
                </ul>
                <p>Use our <b>AI Quiz Generator</b> to test your math on calculating PED coefficients.</p>

The Law of Demand is a fundamental principle in economics. It describes how consumers react to changes in the price of a good or service, assuming everything else that affects demand stays the same (this is called ceteris paribus).

Here's the core idea:

• When price goes up, quantity demanded goes down.
• When price goes down, quantity demanded goes up.

This inverse relationship exists for a few key reasons:

Price elasticity tells you how responsive quantity is to a price change. We primarily focus on Price Elasticity of Demand (PED), but the concept also applies to supply.

Photo by Markus Winkler on Pexels

Normally, supply and demand work together to find an equilibrium price and quantity that maximizes overall welfare. However, certain situations can break this mechanism, leading to market failure. When this happens, resources aren't allocated efficiently, and society could be better off with some sort of intervention.