AP Micro Unit 2

Demand

How much people want an item

Law of Demand

As price decreases, the quantity demanded increases

Diminishing Marginal Utility

The more of a good a consumer has, the less satisfaction they will get out of it

Income Effect

If people have a higher income, they buy more

Shifts in the Demand Curves

1. Change in Income

2. Change in substitute Prices

3. Change in price for complementary goods

4. Change in # of buyers

5. Change in expectations (expect price to go up, demand increase)

6. Change in style/taste (something in style will change demand)

Law of Supply

as price increases, quantity supplied increases

Shifts in Supply Curve

1. Change in production costs

2. Change in technology

3. Change in number of sellers

4. Change in Expectations (producers expect price to increase, supply will decrease)

Price Elasticity of Demand

How much people buy depending on the price

Price Elasticity of Demand Equation

%change in quantity demanded / %change in price

Elasticity

Increase in price causes a decrease in quantity demanded. More flat slope

Inelasticity

Increase in price causes a small decrease in quantity demanded. More Steep Slope

Total Revenue Test

If Price and revenue are positively correlated -> it'll be inelastic

If price and revenue are negatively correlated -> it'll be elastic

Price Elasticity of Supply

How much you want to sell depending on the price

Price Elasticity of Supply Equation

% change in quantity supplied / %change in price

Income Elasticity of Demand

Buying more or less of a good based on income

If IED is positive, good is normal

If IED is negative, the good is inferior

Income Elasticity of Demand equation

% change in quantity demanded / %change in income

Cross Price Elasticity of Demand

How the price of one thing changes based on how much people buy of another good

If CPED is positive, goods are substitutes

If CPED is negative, goods are complements

Cross Price Elasticity of Demand Equation

% Change in quantity demanded of good x / % change in price of good y

Equilibrium

When the amount you sell is the same amount people want to buy

Consumer Surplus

Amount someone is willing to pay for something - How much the good actually is. Also the area below the demand curve but above price equilibrium

Producer Surplus

Price of a good - The amount the buyer is willing to spend. Also the area above the supply curve but below price equilibrium

Price Ceiling

A legal maximum price at which a good can be sold. Deals with Surplus

On a graph: horizontal line below equilibrium

Price Floor

A legal Minimum price at which a good can be sold. Deals with Shortage

On a graph: horizontal line above equilibrium

Deadweight Loss

Loss in economic efficiency. Purchasers can't buy as much as they want and producers can't sell as much as they want

Tax

A financial charge the government imposes in a market

Excise Tax

A per unit tax. Each individual good is taxed a certain amount

Subsidy

The government pays a producer to sell a good for less but the producer gets paid if it was a higher price because of the government payment

Tariff

Tax on an imported or exported good