AP Micro - Unit 2* not finished

What causes a change in the quantity of demand or supply?

The price changing

Result of a change in the quantity of demand

Move up/down the curve, curve stays in the same spot

What happens when the demand or supply is increased?

Curve shifts to the right

What happens when the demand or supply is decreased?

Curve shifts to the left

What changes demand?

1. Taste/preferences

2. Number of consumers

3. Price of related goods

4. Income

5. Expectations

Taste/ Preferences

If there’s an increased interest in something (ex a celebrity wears a shoe), then the demand will go up for it

Number of consumers

More consumers = more demand

Less consumers = less demand

Price of related goods

If the price for one good increases, the demand for a related good will fall (ex: if ski boots become 2x more expensive, people are less likely to buy ski helmets as well)

Income

More income = demands more things

Less income = demands less things

What changes supply?

1. Prices/Availability of inputs (resources)

2. Number of producers

3. Technology

4. Government action - taxes and subsidies

5. Expectations of future profit

Prices/availability of inputs

If resources become harder to purchase/more expensive, less of the product will be made

If resources become easier to purchase/cheaper, more of the product will be made

Number of producers

If more producers make a good, there will be a larger supply

If less producers make a good, there will be a smaller supply

Technology

Improved technology means more supply

Government taxes

Results in less profit, so less supply

Government subsidies

Results in more profit, so more supply

Expectations of future profit

If a business doesn’t think something will sell later, they produce the most when it will sell the most (ex: seasonal items)

Market equilibrium

When the supply and demand curve meet on the same graph

What happens when the quantity supplied is higher than the quantity demanded?

Surplus

How is a surplus fixed?

Producers lower price until demand increases back to equilibrium

What happens when a demand for a good is greater than the quantity ?

Shortage

How is a shortage fixed?

Producers raise prices until demand wanes and goes back to equilibrium

Where is a shortage on a supply/demand graph?

Below the equilibrium point

Where is a surplus on a supply/demand graph?

Above the equilibrium point

What does a free market do?

Automatically pushes the price towards the equilibrium

Normal good

Income and the demand of the good are directly related

Ex: new car, new clothes, jewelry

Inferior good

Income and demand for the product are inversely related

Ex: used car or used clothes

Law of Supply

There is a direct relationship between price and quantity supplied

Law of Demand

There is an inverse relationship of price and quantity demanded

Substitution Effect

If the price goes up for one product, the consumer buys less of that product and more of a substitution

Income Effect

If the price for a product goes down, the purchasing power goes up which allows costumers to purchase more

Double shift rule

When two curves shift at the same time, price and quantity will either be changed or indeterminate (stays the same)

Consumer surplus

The difference between what a consumer is willing to pay and what they actually pay.

Producer surplus

The difference between what a producer is willing to sell a good for and what they sell a good for.

Can producer/consumer surplus be negative?

No; the answer is either positive or zero.

Deadweight loss

Lost opportunity cost due to inefficiency in a trade

Floor

Minimum legal price a seller can charge for a good

Ceiling

Maximum legal price a seller can charge for a good

Where does a ceiling go?

Under the equilibrium

Where does a floor go?

Over the equilibrium

What does a floor create?

Creates a surplus

What does a ceiling create?

Creates a shortage

Elastic demand

As the price for the good goes up, demand for the good decreases

Inelastic demand

Same demand no matter price changes

Inelastic demand coefficient

(demand) less than 1

Elastic demand coefficient

(demand) greater than 1

Unit elastic supply/demand coefficient

1

Characteristics of inelastic goods

1. Not many substitutes

2. Necessities

3. Small portion of income

4. Need to buy now rather than later

Characteristics of elastic goods

1. Many substitutes

2. Luxuries

3. Larger portion of income

4. Not time sensitive

When to use total revenue test?

For demand only!

Formula for demand elasticity coefficient

Percent change in quantity DEMAND/ percent change in price

Formula for supply elasticity coefficient

Percent change in quantity SUPPLY/ percent change in price

When is cross price elasticity used?

For substitutes/complementary items of a good

Cross price elasticity coefficient is NEGATIVE

The items are complimentary

Cross price elasticity coefficient is POSITIVE

The items are substitutes

Income elasticity of demand formula

Percent change in quantity demanded/ percent change in consumers’ real income

Cross price elasticity formula

Percent change in quantity of good A/ percent change in price of good B

Negative coefficient in income elasticity of demand

The good is inferior

Positive coefficient in income elasticity of demand

The good is normal

Percent change formula

(old number-new number)/ old number \*100

Perfectly inelastic supply

Set quantity supplied

Cross price coefficient of 0

Goods are not substitutes nor compliments

Income elasticity coefficient of 0

Quantity of good demanded and income aren’t related