unit 2 econ final review

12th grade ap microeconomics

demand

different quantities of goods that consumers are willing and able to buy at different prices

law of demand

- inverse relationship between price and quantity demanded
- occurs bc of substitution effect, income effect, and law of diminishing marginal utility

substitution effect

product price increases = consumer buys more of substitute product and less of that product (and vice versa)

income effect

produce price decreases = consumers buy more

law of diminishing marginal utility

consuming more units = additional satisfaction from each additional unit eventually decreases

utility

satisfaction

market demand

summation of the consumers' demand

shifters of demand

anything but price

substitutes

Px↑ = Dy↑ (direct relationship)

complements

Px↑ = Dy↓ (inverse relationship)

normal

income↑ = D↑ (direct relationship)
- goods you buy when you have money

inferior

income↑ = D↓ (inverse relationship)
- goods you buy when your poor

substitutes

- goods used in place of another
- ex: pepsi and coke

complements

- two goods that are bought and used together
- ex: skis and ski boots

supply

different quantities of a good that sellers are willing and able to sell (produce) at different prices

law of supply

direct/positive relationship between price and quantity supplied

shifters of supply

anything but price

subsidies

- gov payment that supports market
- supply of a good increases

consumer surplus

- difference between what you are willing to pay and what you actually pay
- CS = buyer's maximum - price

producer's surplus

- difference between the price the seller received and how much they were willing to sell it for
- PS = price - seller's minimum

unit elastic

consumer surplus and producer surplus is balanced

surplus

producers lower prices

shortage

producers raise prices

double shifts

either price or quantity will be indeterminate

elasticity of demand

- measurement of consumers responsiveness to a change in price
- helps firms determine prices and sales
- helps gov decide how to tax

inelastic demand

- not sensitive to price change
- ppl will continue to buy it regardless of price
- elasticity coefficient <1

elastic demand

- sensitive to price change
- price change = quantity demanded changes a lot

elastic demand

P↑ = TR↓ (inverse relationship)

inelastic demand

P↑ = TR↑ (direct relationship)

unit elastic

P↑ = TR—

elastic

positive marginal revenue

total revenue

price x quantity

elastic demand

P↑ = TR↓ (inverse relationship)
- total revenue test

inelastic demand

P↑ = TR↑ (direct relationship)
- total revenue test

price elasticity of supply

how sensitive producers are to a change in price

cross price elasticity of demand

- how sensitive a product is to a change in price of another good
- shows if goods are substitutes or complements

complements

coefficient = negative (shows inverse relationship)
- cross price elasticity

substitutes

coefficient = positive (shows direct relationship)
- cross price elasticity

income elasticity of demand

- how sensitive a product is to a change in income
- shows if goods are normal or inferior

inferior

coefficient = negative (shows inverse relationship)
- income elasticity

normal

coefficient = positive (shows direct relationship)
- income elasticity

price ceiling

maximum legal price a seller can charge

price floor

minimum legal price a seller can sell

excise tax

per unit tax on producers

MB = MC

when to stop consuming

utility maximization