AP Economics Unit 5: Demand & Elasticity Vocabulary

Vocabulary flashcards covering demand, supply, elasticity, and determinants as presented in the lecture notes.

Demand

The amount of a particular good or service consumers are willing and able to buy at different possible prices at a particular time; ceteris paribus.

Law of Demand

When the price of a product increases, the quantity demanded falls, ceteris paribus.

Supply

The amount producers are willing and able to offer for sale at different possible prices at a particular time; ceteris paribus.

Law of Supply

Manufacturers will produce more when prices rise and produce less when prices fall; ceteris paribus.

Market Equilibrium

The price at which quantity supplied equals quantity demanded.

Buying Power

The purchasing power of consumers; increases when prices fall and decreases when prices rise.

Income Effect

The change in consumption patterns due to a change in purchasing power.

Diminishing Marginal Utility

As more of a good is consumed, the additional satisfaction from each extra unit decreases, helping explain why demand is not limitless.

Diminishing Personal Value

As prices rise, consumers prioritize what is most important and allocate value to items accordingly.

Substitutes

Goods or services that can replace each other; a rise in the price of one increases the demand for the other.

Complementary Goods

Goods that are typically consumed together; a rise in the price of one leads to a decrease in demand for the other.

Price Elasticity of Demand (PED/PEoD)

A measure of how responsive quantity demanded is to a price change; calculated as percent change in quantity demanded divided by percent change in price.

Elastic Demand

Demand that is highly responsive to price changes (PED > 1).

Inelastic Demand

Demand that is not very responsive to price changes (PED < 1).

Unit Elastic

PED = 1; percentage change in quantity demanded equals percentage change in price.

Perfectly Elastic

PED = ∞; any price increase causes quantity demanded to drop to zero; horizontal demand curve.

Perfectly Inelastic

PED = 0; quantity demanded does not change with price.

Relatively Elastic

PED > 1 (but not infinite); small price changes cause relatively large quantity changes.

Relatively Inelastic

PED < 1; quantity changes little with price changes.

Availability of Substitutes

A key determinant of elasticity; more substitutes lead to more elastic demand, fewer substitutes lead to more inelastic demand.

Time Horizon

Time available to adjust; short run -> inelastic, long run -> elastic.

Category of Product

Broad categories tend to be less elastic; specific/narrow categories tend to be more elastic.

Necessities vs Luxuries

Necessities tend to be inelastic; luxuries tend to be elastic.

Purchase Size vs Budget Share

Smaller items tend to be more inelastic; larger purchases tend to be more elastic.

Shifts in the Demand Curve

A non-price factor causes the entire demand curve to shift left or right; a rightward shift means higher demand at each price.

Demand Shifters

Income, Prices of Related Goods, Tastes, Expectations, and Number of Buyers.

Normal Good

A good for which demand increases as income rises and decreases as income falls.

Inferior Good

A good for which demand decreases as income rises and increases as income falls.

Movement Along the Demand Curve

A change in price causes a movement along the demand curve (quantity demanded changes) while other non-price factors remain constant.