AP Econ Unit 2

demand

what good or service a consumer is willing or able to buy

the entire line on a graph

Demand is

quantity demand

the total number of a good or service consumers will buy at different places

the points on graph

quantity demand is 

The Law of demand

a demand curve is downward sloping

inverse relationship between price and quantity demand

quantity demand decreases

Increased price means

quantity demand increases

decreased price means 

Price

only affects points on the line (quantity demand)

Substitution effect

Income effect

Law of Diminishing Marginal Utility 

3 Reasons why the Law of Demand occurs

Substitution effect

a change in price will motivate people to buy more or less substitutes

Income effect

a change in price will affect peoples purchasing power compared to their income

Law of Diminishing Marginal Utility

the more items you consume, the less additional happiness you’ll receive 

Taste and preferences

Expectation in the future

New consumers

Income

Substitute or Complimentary goods 

What are the demand shifters?

Expensive

Normal good

cheap

Inferior good

Substitute Good

goods used in place of one another

Ex: pepsi price increases, cokes demand increases

Complement Good

goods that are bought and used together

Ex: price of hot dogs increases, demand for buns decreases

market economy 

people and business make economic decisions based on their own interests

demand curve

shows the quantity of a good or product a consumer demands at every possible price

marginal utility

additional satisfaction

change in quantity demand

movement from one point to another along the demand curve

change in demand

a shift of the entire demand curve to the right or left

supply

WHAT good or service producers are willing or able to sell

Entire line

quantity supply

total NUMBER of a good that producers will sell at a specific price

Point on a line

law of supply

a apply curve is sloping upward because there is a direct relationship between price and quantity supply

increased price

increased quantity supply

decreased price

decreased quantity supply

What are the 5 supply shifters?

1. Availability or prices of inputs (resources)

2. Government actions

3. Expectations of future profit

4. Number of sellers

5. Technology 

Taxes

fees paid to the government, hurts businesses

Subsidy

payment from the government to a business, helps businesses 

market supply curve

shows the quantity of offered by ALL producers that offer the same product for sale in a given market 

change in quantity supply

change in amount offered for sale in response to a price change, or movement along an individual or market supply curve

supply elasticcity

a measure of how the quantity supplied responds to a change in price

Explain how the law of supply is related to opportunity cost

law of supply is a direct relationship between price and quantity supply while opportunity cost is the opportunities lost. As your supply increases, the price increases, so the opportunity cost increases.

Both have a direct relationship

double shift rule

when both supply and demand shift, the equilibrium price or quantity will be indeterminate 

surplus

quantity supplied is greater than the quantity demanded at a given price

shortage

quantity demanded is greater than the quantity supplied at a given price

how to determine the equilibrium of supply and demand curve?

supply and demand equal one another

consumer surplus

difference between what you’re willing to pay and what you actually pay

producer surplus

difference between what you’re willing to sell it for and the price the seller received 

equilibrium is…

where the surplus is always maximized

price ceiling

maximum legal price a seller can charge for a product

must go below equilibrium

price floor

minimum legal price a seller can sell a product for

must go above the equilibrium

deadweight loss

loss market efficiency when society is not producing at equilibrium

excise tax

per unit tax on suppliers 

world price

a country can import a good from other countries at a cheaper price

trade tariff

tax on imported goods that increases the price of imported goods

trade quota

limit on the amount of imported goods

why are quotas and tariffs helpful?

helps unemployment and protects the domestic producers from cheaper substitutes

exported

sold to other countries

imported

purchased from other countries

comparative advantage 

the ability of one country to produce a good more cheaply than another country

free trade

trade with few or no barriers

exchange rate

the price of ones nations currency compared with that of another nation’s currency

balance of trade 

the difference between the value of a countries imports and its exports

trade surplus

when the value of a countries exports is greater than the value of its imports

trade deficit

when the value of a countries imports is greater than the value of its exports