AP Micro Unit 2 Notes

Equilibrium

Supply = Demand, NATURALLY in the free market.

Increase in demand,

increase in supply and price as well

Price Floor

a minimum price designed to help producers, generally results in surpluses, must be above equilibrium price to be binding.

Price Ceiling

Maximum price, helps consumers, generally results in shortages, must be below equilibrium to be binding.

The Ceiling is on the _______, the floor is on the ________.

floor, ceiling

Relationship between Law of Demand and elasticity

Consumers buy more at lower prices, elasticity tells us how much.

Why do businesses care about demand elasticity?

It makes them wonder if they should lower or increase price.

Inelastic demand

Quantity is insensitive to a change in price, if the price increases, quantity only falls a little, steep curve.

Examples of inelastic demand

Toilet paper, gas, milk, diapers, and medical care.

Characteristics of inelastic demand

Few substitutes, necessities, small portion of income, required now rather than later, elastic coefficient is less than 1.

Elastic demand

Quantity is sensitive to a change in price, relatively flat curve.

Examples of elastic demand

Housing, restaurants, and personal services.

Characteristics of elastic demand

Many substitutes, luxuries, large portion of income, and urgent.

Formula for elasticity

%change in quantity (Q2-Q1/Q1 × 100) / %change in price (P2-P1/P1 × 100).