AP MICRO UNIT 2.1-2.2

what is demand

relationship between the possible prices of a product and the quantities of a product consumers buy

to have demand for something you must…

want it, have the ability to buy it, be willing to buy it

demand schedule

table that shows how much of a good or service consumers wnat to buy at diff prices

demand curve

graph that shows how much of a good consumers want to buy at diff prices

Law of Demand

inverse relationship between products price(P) and quantity demanded(Q)

As the price of a product increases, quantities demanded of a product decreases

Law of demand

3 behavioiur patterns -

1. substitution effect

2. income effect

3. law of diminishing marginal utility

substitution effect

if the price goes up for a product, consumer buy less of that product and more of another subsitute product

Income Effect

if the price goes down for a product, the purchasing power of consumers income increases making them purchase more

Law of diminishing marginal utility

as u consume anything, the additional satisfaction recieved will eventually decrease

when reading demand curve assume…

outside factors are the same ex income

Market demand

sum of quantities demanded by all consumers in a market

change in demand

shown by shifts in demand curve

changed by changes in demand factors(determinants of demand)

change in quantity demanded

shown by movements along the demand curve

caused by price changes

what happens to the demand for milk if the price of milk goes up

NOTHING THE DEMAND STAYS THE SAME (price doesnt shift the curve -it moves along the curve)

determinants of demand:

1. prices of related goods

1. substitutes are goods used in place of one another(ex. price of pepsi falls, demand for coke will decrease, if price of one increases, the demand for the other will increase) as more ppl will want to buy whatever benefits them the most

2. complements are tow goods that are bought and used together (ex. if price hotdog galls demand for hot dog buns will increase -if the price of one increases the demand for the other will fall)

Determinants of demand

2. income

1. normal good(ex luxury car)

as income increases, demand increases. as income falls, demand falls

2. inferior goods (ex. used car, cup noodle, spam (cheaper items))

as income decreases, demand increases. as income increases demand decreases.

3. change in consumer tastes and preferences

change in demand due to beliefs, cultural shifts, what is trending, political situations (can change anytime)

change in consumer expectations

expectations of a future drop in price lead to a decrease in demand today(less ppl will buy now as consumers know price will drop in future)

expectations of a future rise in price cause an increase in demand today (more ppl wanna buy while its cheap)

5. change in number of consumers

increase in number of consumers increases demand

the more ocnsumers the more demand

hamburger (assume )population boom

increase in demand, change in number of consumers

incomes fall due to recession

decrease, change income

price of tacos a substiture, decreases

decreases, change in price of related goods

more immigrants and refugees coming to the country

increase, change in number of consumers

new health craze -no ground beef

decrease, change in consumer tastes and preferences

hamburger restaurants announce that they will significantly increase prices next month

change in consumer expectations

price of fries a complement, increases

decrease, change in price of related goods

restaurants lower price of burgers to 1$

no shift, movement along the demand curve(change in quantities demanded)

what is supply

relationship between possible prices of a product and the quantities of that product businesses are willing to supply

law of supply

direct relationship between product price (P) and quantity supplied (Q)

as the price of a product increases, the quantities supplied of a product increases.

as the price of a product increases, the quantity producers make increases.

as the price falls, quantity products make falls. why?

higher prices → profit seeking firms have an incentive to produce more(make more money)

change in supply

shown by shifts in the supply curve

caused by changes in supply factors (determinants of supply)

change in quantity supplied

shown by movements along the supply curve

caused by prices changes

determinants of supply:

change in price of inputs (resources)

ex. decrease in price of ingredients for ramen makes it cheaper to produce ,increasing supply of ramen

change in seller expectations

if seller of air conditioner units are expecting a cold summer ahead, supplu of air conditioners decreases

change in technology

ex. upgrades in technology in car production leads to increase in supply of cars

government action: changes in taxes and subsidies

subsidies government payment that supports a business or market which can cause the supply of a good to increase (gov pays u to produce smth).

taxes: maeks them lose money buy getting TAXED

change in number of suppliers

more suppliers increases the supply of a good in the industry

change in prices of other goods

suppose goods a and b require the same resources to produce. if price of b increases, this will decrease the supply A

identity shifter then decide if supply increase or decrease

hamburgers.

virus kills 20% of cows

decrease, change in number of suppliers

more producers of hamburgers enter the market

increase, change in number of suppliers

government taxes burger producers

decrease, government action

new bun baking tehcnology cuts production time in half

increase, change in technology

the government provides subsidies to dairy farmers

increase, government action

increase in price of hamburgers by 1$

change in quantity supplied, no shift!