Unit 2 AP Microeconomics

Demand

The quantities consumers are willing and able to buy at a certain price.

Law of Demand

There is an inverse relationship between the price and quantity demanded of an item.

The Substitution Effect

As the price of a good increases, the quantity demanded of that good lessens as consumers buy more of cheaper substitutes.

The Income Effect

People buy more when they feel richer and less when they are poorer.

The Law of Diminishing Marginal Utility

The more of a good you consume, the less marginal utility you receive each time.

Shifts in Demand

Left or right shifts in demand, never up or down. PRICE NEVER SHIFTS A CURVE, ONLY ALONG A CURVE.

5 Shifters of Demand

1. Tastes and Preferences

2. Number of Consumers

3. Price of Related Goods

4. Income

5. Future Expectations of Price

Normal Goods

Goods that people buy more of as income increases.

Inferior Goods

Goods that people buy more of as income decreases.

Supply

The quantity producers are willing and able to make at any given price.

Law of Supply

There is a direct relationship between price and quantity supplied.

5 Shifters of Supply

1. Price/Availability of Inputs/Resources

2. Number of Producers

3. Technology

4. Government Action

5. Expectations of Future Profit

Elasticity

How much more or less consumers buy based on price changes.

Inelastic Demand

When quantity demanded changes a little due to price change; typically has few substitutes and is a necessity.

Elastic Demand

When quantity demanded changes a lot due to price change; typically has many substitutes and is a luxury.

Perfectly Inelastic Demand

A vertical line demand curve where quantity demanded doesn’t change based on price.

Total Revenue Test

Price multiplied by quantity. If the relationship is direct, it's inelastic; if it's inverse, it's elastic.

PES (Price Elasticity of Supply)

How sensitive quantity supplied is to a change in price.

XED (Cross Elasticity of Demand)

How sensitive quantity demanded is to a change in price of another good.

YED (Income Elasticity of Demand)

How sensitive quantity demanded is to a change in income.

Disequilibrium

When the market is not at equilibrium (any point besides equilibrium).

Consumer Surplus

The difference in how much consumers are willing to spend and how much they actually spend.

Producer Surplus

The difference between how much producers are willing to sell and how much they sell at.

Price Ceiling

The maximum price the government allows sellers to sell at, creating a shortage.

Tariff

A tax on imports that increases world price.

Quota

A limit on the number of goods that can be imported.