AP Microeconomics Unit 2

Law of Demand

Law of Demand

Consumers buy more of a good at low prices and less at high prices, resulting in a downward sloping demand curve. (inverse relationship)

Non-Priced Determinants of Demand

Factors like tastes, market size, prices of related goods, changes in income, and expectations that shift the demand curve.

Substitution Effect

An increase in price makes substitutes more attractive, while a decrease makes alternatives less desirable.

Income Effect

Price changes affect purchasing power, influencing the quantity demanded.

Law of Supply

Producers sell more at high prices and less at low prices, leading to an upward sloping supply curve.

Non-Priced Determinants of Supply

Factors like input prices, government tools, number of sellers, technology, and producer expectations that shift the supply curve.

Price Elasticity of Demand

Measures how quantity demanded responds to price changes through tests like necessity, substitutes, and total revenue.

Unit Elastic Demand

Proportional change in quantity demanded with price changes, maximizing total revenue.

Marginal Revenue Curve

Shows total revenue changes with price variations, indicating elastic, unit elastic, or inelastic portions.

Elasticity Coefficient

Measures responsiveness of quantity demanded or supplied to price changes, calculated as percentage change in quantity over price change.

Price Elasticity of Supply

Measures how quantity supplied responds to price changes, with interpretations based on the coefficient.

Consumer and Producer Surplus

Differences between value and price for consumers, and price received and cost for producers, contributing to economic surplus.

Allocative Efficiency

Achieved when marginal cost equals marginal benefit, maximizing economic surplus.

Deadweight Loss

Reduction in economic surplus due to failure to reach equilibrium, calculated by comparing marginal cost and benefit.

Price Floor

Government intervention setting a minimum price, impacting quantity demanded and supplied, leading to surplus and deadweight loss.

Price Ceiling

Government intervention setting a maximum price, affecting quantity demanded and supplied, resulting in shortage and deadweight loss.

Per Unit Excise Tax

Tax imposed on each unit of a good, shifting the supply curve, affecting equilibrium price and quantity, tax revenue, and deadweight loss.

Tax Incidence

Refers to who bears the burden of a tax based on the elasticity of demand or supply.

International Trade and Tariffs

Involves countries trading goods with tariffs imposed on imported goods, impacting prices, quantities, producer and consumer surplus, tariff revenue, and efficiency loss.