Demand and supply curves predict how markets respond to changes. Shifts and movements are the core of the analysis.
↔️ Movements vs shifts
A change in price moves you along the demand or supply curve (a change in quantity demanded or supplied). A change in anything else shifts the curve. Demand shifts with income, tastes, population, prices of related goods (substitutes, complements) and expectations. Supply shifts with costs of production, technology, taxes, subsidies and the number of firms. A rightward shift means more; leftward means less.
income rises → demand for a normal good shifts right
price of coffee rises → demand for tea shifts right (substitute)
new technology → supply shifts right
tax on producers → supply shifts left
🖼️ See it
When demand shifts right, both the equilibrium price and quantity rise.
⚖️ Finding the equilibrium
With a demand function and a supply function you can find equilibrium. If Qd = 100 − 5P and Qs = 20 + 3P, set Qd = Qs: 100 − 5P = 20 + 3P → 80 = 8P → P = 10, Q = 50. A price ceiling below equilibrium causes shortage; a price floor above equilibrium causes surplus. Consumer surplus is the gap between what buyers would pay and what they do pay.
Check your algebra: put the price back into both equations; Qd and Qs must match.
✏️ Quick check · 1 of 7
Shift
A rise in consumers’ incomes (normal good) will:
Demand curve.
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Movement
A change in the good’s own price causes:
Along.
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Price ceiling
A binding price ceiling set below equilibrium causes:
Too low.
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Subsidy
A subsidy to producers shifts:
Cost reduction.
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Qd = 100 − 5P and Qs = 20 + 3P.
What is the equilibrium price?
Enter an exact answer, without rounding.
Set Qd = Qs.
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Qd = 100 − 5P and Qs = 20 + 3P.
What is the equilibrium quantity?
Enter an exact answer, without rounding.
Put P = 10 back.
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With a price ceiling of 8: Qd = 100 − 5(8) and Qs = 20 + 3(8).
What is the shortage, in units?
Enter an exact answer, without rounding.
units
Compute both quantities.
📝 Lesson quiz · 5 questions
0 / 5
Re-read the lesson, then give it another go.
Question 1 of 5
Which shifts the demand curve?
Question 2 of 5
A fall in production costs shifts:
Question 3 of 5
A price floor above equilibrium causes:
Question 4 of 5
Complements are goods that:
Question 5 of 5
Consumer surplus is:
Lesson 2 · Microeconomics
🧲 Elasticity
Elasticity measures how strongly buyers or sellers react to changes. It determines who pays a tax and how revenue changes.
📏 Price elasticity of demand
PED = % change in quantity demanded ÷ % change in price (ignore the sign). If PED > 1, demand is elastic (quantity responds a lot). If PED < 1, demand is inelastic (necessities, addictive goods). If PED = 1, it is unitary. Elastic goods have close substitutes, are luxuries and take a large share of income.
For the same price rise, buyers cut back sharply along the flat curve and barely at all along the steep one.
💰 Elasticity and revenue
Total revenue = P × Q. If demand is elastic, a price cut raises revenue. If demand is inelastic, a price rise raises revenue. Governments tax inelastic goods (tobacco, fuel) to raise revenue because quantity barely falls. Income elasticity shows how demand responds to income: positive for normal goods, negative for inferior goods. Cross elasticity is positive for substitutes and negative for complements.
P 10, Q 100 → TR 1000
P 8, Q 140 (elastic) → TR 1120 (rises)
income +10%, demand +20% → YED = +2 (luxury)
Time matters. Demand is more elastic in the long run because people can find alternatives.
✏️ Quick check · 1 of 7
Elastic
Demand is elastic when PED is:
Over 1.
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Inelastic
Which good is likely inelastic?
Necessity.
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Revenue
If demand is inelastic, raising price will:
Price effect dominates.
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Cross elasticity
Cross elasticity of demand is positive for:
Alternatives.
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Price rises 10% and quantity demanded falls 20%.
What is PED (ignore the sign)?
Enter an exact answer, without rounding.
% change in Q ÷ % change in P.
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Price rises 10% and quantity demanded falls 4%.
What is PED (ignore the sign)?
Enter an exact answer, without rounding.
% change in Q ÷ % change in P.
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Price falls from $10 to $8 and quantity rises from 100 to 140.
What is the new total revenue, in $?
Enter an exact answer, without rounding.
$
P × Q.
📝 Lesson quiz · 5 questions
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Re-read the lesson, then give it another go.
Question 1 of 5
Demand is more elastic when:
Question 2 of 5
If PED = 0.5, demand is:
Question 3 of 5
A government raises tax on a good with inelastic demand to:
Question 4 of 5
An inferior good has:
Question 5 of 5
Total revenue equals:
Lesson 3 · Microeconomics
📐 Costs, Revenue & Profit
Firms maximise profit by comparing the extra revenue and cost of producing each additional unit.
➕ Marginal analysis
Marginal cost (MC) is the extra cost of one more unit; marginal revenue (MR) is the extra revenue from one more unit. A firm maximises profit where MR = MC: producing more adds revenue above cost until MC rises to equal MR. For a price taker, MR = price. Average cost = TC ÷ Q, with the shape of a U because of economies then diseconomies of scale.
Q: 1, 2, 3, 4
TC: 30, 50, 66, 82
MC: 30, 20, 16, 16 (66 − 50 = 16)
price $18: produce while MC < 18 → up to 3 or 4 units
🖼️ See it
Revenue £8 per unit; fixed cost £20 plus £4 per unit. Beyond 5 units the firm makes a profit.
🧾 Short run and long run
In the short run at least one input is fixed; in the long run all inputs can change. The law of diminishing marginal returns: adding more of a variable input to a fixed input eventually gives smaller extra output (more workers in a small kitchen). A firm shuts down in the short run if price < average variable cost. Normal profit covers the owner’s opportunity cost; abnormal (supernormal) profit is above that and attracts new entrants.
workers: 1, 2, 3, 4
total output: 10, 24, 32, 36
marginal product: 10, 14, 8, 4 → diminishing after the second worker
Think at the margin. Ask “what happens if I produce one more?”, not “what is my average?”.
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Marginal cost
Marginal cost is:
One more.
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Profit max
A firm maximises profit where:
Marginal rule.
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Diminishing returns
Diminishing marginal returns means:
Crowding.
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Short run
In the short run:
Some fixed.
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Total cost rises from $50 for 2 units to $66 for 3 units.
What is the marginal cost of the 3rd unit, in $?
Enter an exact answer, without rounding.
$
Change in total cost.
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Total cost is $240 for 20 units.
What is the average cost, in $?
Enter an exact answer, without rounding.
$
Divide.
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A firm sells 50 units at $30 and its total cost is $1100.
What is its profit, in $?
Enter an exact answer, without rounding.
$
TR − TC.
📝 Lesson quiz · 5 questions
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Re-read the lesson, then give it another go.
Question 1 of 5
For a price taker, marginal revenue equals:
Question 2 of 5
Abnormal profit in a competitive market will:
Question 3 of 5
A short-run shutdown happens if price is below:
Question 4 of 5
The long run is when:
Question 5 of 5
Normal profit is:
Lesson 4 · Microeconomics
🧑💼 Labour Markets & Wages
Wages are the price of labour, set by demand from firms and supply from workers.
👷 Demand and supply of labour
Firms’ demand for labour is derived from the demand for the goods workers produce. It depends on the marginal revenue product (MRP): the extra revenue from one more worker. The supply of labour depends on wages, skills required, working conditions and alternatives. Wages differ because of skills, risk, training time, scarcity and unions. A minimum wage sets a floor; it can raise pay for many but may reduce jobs if set too high.
extra worker adds 10 units worth $5 each
MRP = 10 × 5 = $50
hire if wage < $50
minimum wage $12; equilibrium wage $10 → some may be unemployed
🖼️ See it
Firms hire fewer workers as wages rise; more people want to work as wages rise. The wage settles where the two lines cross.
📊 Unemployment
Unemployment rate = unemployed ÷ labour force × 100. The labour force = employed + unemployed (those seeking work). Types: frictional (between jobs), structural (skills mismatch after industries decline), cyclical (recession) and seasonal. Policy responses: retraining, job-search support, and demand stimulus. Automation can destroy some jobs and create others.
employed 190 million + unemployed 10 million = labour force 200 million
unemployment rate = 10 / 200 = 5%
People not looking for work are not in the labour force (students, retirees, those who gave up).
✏️ Quick check · 1 of 7
Derived demand
The demand for labour is derived from:
Depends on output.
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Structural
Structural unemployment occurs when:
Mismatch.
✏️ Quick check · 3 of 7
Frictional
Frictional unemployment is:
In transition.
✏️ Quick check · 4 of 7
Minimum wage
A minimum wage set above equilibrium may:
Price floor.
✍️ Type your answer · 5 of 7
An extra worker produces 10 units that sell for $5 each.
What is the MRP, in $?
Enter an exact answer, without rounding.
$
Output × price.
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There are 190 million employed and 10 million unemployed.
What is the unemployment rate, in %?
Enter an exact answer, without rounding.
%
Unemployed ÷ labour force.
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A worker earns $15 per hour and works 40 hours a week.
What is the weekly pay, in $?
Enter an exact answer, without rounding.
$
Multiply.
📝 Lesson quiz · 5 questions
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Re-read the lesson, then give it another go.
Question 1 of 5
Which is a cause of cyclical unemployment?
Question 2 of 5
The labour force includes:
Question 3 of 5
A higher MRP makes a worker:
Question 4 of 5
Trade unions aim to:
Question 5 of 5
Retraining helps reduce:
Lesson 5 · Macroeconomics
🎈 Inflation & Interest Rates
Inflation changes the value of money. Central banks use interest rates to keep prices stable.
🧺 Measuring inflation
Inflation is the rate at which the general price level rises. It is measured with the Consumer Price Index (CPI), a weighted average of a basket of goods. Inflation rate = (CPI now − CPI before) ÷ CPI before × 100. Real value = nominal value adjusted for inflation. Deflation is falling prices; disinflation is a slower rate of inflation.
When prices rise 5% a year, the same money buys less and less. Higher interest rates make saving more attractive and borrowing dearer, which slows inflation.
🏦 Causes and central banks
Demand-pull inflation: demand rises faster than supply. Cost-push: production costs (oil, wages) rise. Central banks target about 2% inflation. Raising the interest rate makes borrowing costlier and saving more attractive, reducing spending and slowing inflation; cutting it does the opposite. High inflation hurts savers and people on fixed incomes; very low or negative inflation can cause deflation and delayed spending.
rate up 0.5 → mortgages cost more → demand falls → inflation eases
Hyperinflation: over 50% a month (Zimbabwe 2008; Weimar Germany 1923)
Real, not nominal. Always adjust for inflation when comparing money across time.
✏️ Quick check · 1 of 7
CPI
CPI measures:
Basket.
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Demand-pull
Demand-pull inflation occurs when:
Demand rises.
✏️ Quick check · 3 of 7
Cost-push
Which causes cost-push inflation?
Costs.
✏️ Quick check · 4 of 7
Interest rates
Raising interest rates typically:
Cool the economy.
✍️ Type your answer · 5 of 7
CPI rises from 100 to 104.
What is the inflation rate, in %?
Enter an exact answer, without rounding.
%
Change ÷ original.
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Wages rise 5% while inflation is 3%.
About what is the real wage rise, in %?
Enter an exact answer, without rounding.
%
Subtract.
✍️ Type your answer · 7 of 7
A good costs $200 and inflation is 5% for the year.
What will it cost next year, in $?
Enter an exact answer, without rounding.
$
Add 5%.
📝 Lesson quiz · 5 questions
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Re-read the lesson, then give it another go.
Question 1 of 5
The inflation target of many central banks is about:
Question 2 of 5
Who gains from unexpected inflation?
Question 3 of 5
Deflation is:
Question 4 of 5
Hyperinflation is:
Question 5 of 5
A central bank is:
Final Challenge
🏆 10-Question Challenge Quiz
Questions from every topic in this course. Pick an answer for each one, then hit Check My Answers.
0 / 10
💪 Keep practicing — go back through the lessons and retake the quiz!
Q1 · Demand & Supply Analysis
If demand rises and supply is unchanged, equilibrium price and quantity:
Q2 · Demand & Supply Analysis
Consumer surplus is:
Q3 · Elasticity
Elastic demand means that a price cut will:
Q4 · Elasticity
Total revenue equals:
Q5 · Costs, Revenue & Profit
Profit is maximised by producing until:
Q6 · Costs, Revenue & Profit
Normal profit is:
Q7 · Labour Markets & Wages
Wages for dangerous work are often higher because of:
Q8 · Labour Markets & Wages
Retraining helps reduce:
Q9 · Inflation & Interest Rates
If wages rise 2% and prices rise 5%, workers’ real income: