AP MICRO UNIT 2 Demand Supply and Elasticities

Law of Demand

As price decreases, quantity demanded increases; as price increases, quantity demanded decreases.

Law of Supply

As price drops, quantity supplied decreases; as price increases, quantity supplied increases.

Shift in Demand Factors

Factors that cause shifts in demand include income, number of buyers, substitutes, expectations, complements, and tastes.

Complementary Goods

Goods that are produced together, such as pies and turnovers; increased production of one leads to increased production of the other.

Substitute Goods

Goods that can replace each other, such as baggy jeans and skinny jeans.

Price of Resources

The cost of inputs; an increase in input price (like cheese for pizza) leads to decreased production.

Number of Sellers

The total businesses in a market; more sellers increases competition and may drive some out of business.

Productivity

The efficiency of production; can decrease with disasters (e.g., factory fire) or increase with technology.

Government Regulation

Laws that affect supply; such as minimum wage laws impacting businesses' operational decisions.

Elasticity of Demand

A measure of how much the quantity demanded of a good responds to a change in price.

Midpoint Method

A formula to calculate elasticity: % change in quantity demanded divided by % change in price.

Elastic Demand

When elasticity is greater than 1; consumers are sensitive to price changes.

Inelastic Demand

When elasticity is less than 1; consumers are less sensitive to price changes.

Unit Elastic Demand

When elasticity equals 1; the percentage change in quantity demanded equals the percentage change in price.

Availability of Substitutes

Having easy alternatives makes demand more elastic; fewer substitutes make demand inelastic.

Luxury Goods

Products that are non-essential; tend to have elastic demand.

Necessity Goods

Essential items; typically have inelastic demand.

Narrow vs. Broad Definition

Narrowly defined products generally have elastic demand, while broadly defined categories have inelastic demand.

Time since Price Change

Short-term demand tends to be inelastic; long-term demand is generally more elastic due to available substitutes.