Source: Practice MCQs for Exam 1, Texas A&M University
Tags: law of demand, demand curve, inverse demand, supply curve, perfectly inelastic supply, substitutes in production, real price, supply and demand shifts, equilibrium
The law of demand says quantity demanded falls when price rises (and vice versa). Demand curves can be written in standard form (Q as a function of P) or inverse form (P as a function of Q). Supply curves typically slope upward. When supply or demand shifts, you need to trace through the effect on equilibrium price and quantity, paying attention to whether supply is elastic or perfectly inelastic.
Law of demand
When the price of a good rises, the quantity demanded falls, all else equal. When the price falls, the quantity demanded rises.
Demand curve (standard form)
Expresses quantity as a function of price: Q = f(P). Example: Q = 80 - 0.2P.
Inverse demand curve
Expresses price as a function of quantity: P = f(Q). To convert, solve the standard demand equation for P. Example: Q = 80 - 0.2P becomes P = 400 - 5Q.
Supply curve
Shows the relationship between the price of a good and the quantity supplied. Usually has a positive slope (higher price, more supplied).
Perfectly inelastic supply
A vertical supply curve. Quantity supplied does not respond to price changes at all. If demand increases against perfectly inelastic supply, only price rises; quantity stays the same.
Substitutes in production
Inputs or materials that can replace each other in the production process. If the price of one rises, producers switch to the other, increasing demand for the substitute. Example: if plastic and steel are substitutes for car body panels and the price of plastic rises, the demand curve for steel shifts right.
Real price
The price of a good adjusted for inflation. A decrease in real price means the good has become cheaper relative to the general price level.
Price up, quantity demanded down.
Price down, quantity demanded up.
Any answer choice that reverses this relationship violates the law of demand.
Given Q = 80 - 0.2P, solve for P:
0.2P = 80 - Q
P = (80 - Q) / 0.2
P = 400 - 5Q
The inverse demand form is what you plot on a standard price-quantity graph (P on the vertical axis).
Supply curves show the relationship between the price of a good and the quantity supplied.
They usually slope upward (positive slope).
Do not confuse "positive slope" with "positive relationship with income." The supply curve relates quantity to the good's own price, not to income.
If supply is perfectly inelastic (vertical), quantity cannot change.
An increase in demand shifts the demand curve right, but since supply is fixed, only the price rises.
There is no change in equilibrium quantity.
Plastic and steel as substitute inputs: if plastic gets more expensive, firms want more steel.
This shifts the demand curve for steel to the right, not to the left.
The supply curve for steel is not directly affected by the price of plastic (unless steel's own production costs change).
An unambiguous decrease in the real price of a good requires:
Supply shifts right (more supply pushes price down), AND
Demand shifts left (less demand pushes price down).
Both forces push price in the same direction (downward), so the decrease in price is unambiguous. If both curves shift in the same direction (both right or both left), the effect on price is ambiguous because one force pushes price up while the other pushes it down.
Standard to inverse demand conversion:
Given Q = a - bP, the inverse demand is P = (a - Q) / b = (a/b) - (1/b)Q.
Example: Q = 80 - 0.2P → P = 400 - 5Q.
⚠️ "Inverse demand" is a common exam question. Always solve for P, not Q.
⚠️ With perfectly inelastic supply, shifts in demand change price only, never quantity.
⚠️ For "unambiguous" price changes, both curves must push price in the same direction. If supply shifts right and demand shifts left, price unambiguously falls.
⚠️ Substitutes in production shift the demand curve for the other input, not the supply curve.
Q: Which is consistent with the law of demand? (a) Price of milk decreases, quantity demanded decreases (b) Price of soda increases, quantity demanded decreases (c) Price of oranges increases, quantity demanded increases (d) Price of juice decreases, no change in quantity demanded
A: (b). An increase in price causing a decrease in quantity demanded is the textbook law of demand.
Q: The demand curve is Q = 80 - 0.2P. What is the inverse demand curve?
A: P = 400 - 5Q. Rearrange: 0.2P = 80 - Q, so P = (80 - Q)/0.2 = 400 - 5Q.
Q: If market supply is perfectly inelastic and demand increases, what happens?
A: Price rises, but market output does not change. The vertical supply curve means quantity is fixed.
Q: Plastic and steel are substitutes in production. If the price of plastic increases, what happens to the steel market?
A: The demand curve for steel shifts to the right. Producers substitute away from plastic toward steel.
Q: What combination of supply and demand shifts causes an unambiguous decrease in real price?
A: Supply shifts right and demand shifts left. Both forces push price downward.
law of demand, inverse demand curve, demand curve conversion, supply curve slope, perfectly inelastic supply vertical, substitutes in production, input substitution, real price decrease, supply shift right demand shift left, equilibrium price change, ECON 323 exam 1