AP ECON UNIT 2

Demand

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

Law of Demand

There is an inverse relationship between price and quantity demanded; as price increases, demand decreases.

Substitution Effect

When the price of a product rises, consumers buy less of it and more of a substitute product.

Income Effect

When the price of a product falls, consumers’ purchasing power increases, allowing them to buy more.

Law of Diminishing Marginal Utility

The more of a good a person consumes, the less satisfaction (utility) they get from each additional unit.

Increase in Demand

When prices stay the same but people want to buy more; shown by a rightward shift in the demand curve.

Decrease in Demand

When prices stay the same but people want to buy less; shown by a leftward shift in the demand curve.

Substitutes

Goods used in place of one another; if the price of one increases, demand for the other increases.

Complements

Goods that are used together; if the price of one increases, demand for the other decreases.

Normal Goods

Goods for which demand increases as income increases (e.g., luxury cars, seafood).

Inferior Goods

Goods for which demand decreases as income increases (e.g., ramen noodles, used cars).

Supply

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

Law of Supply

There is a direct relationship between price and quantity supplied; as price increases, producers make more.

Subsidy

A government payment that supports a business or market, increasing supply.

Taxes

Government actions that decrease supply by raising production costs.

Double Shifts Rule

If both supply and demand shift at the same time, either price or quantity will be indeterminate.

Consumer Surplus (CS)

The difference between what a buyer is willing to pay and what they actually pay.

Producer Surplus (PS)

The difference between the price sellers receive and the minimum they are willing to accept.

Change in Demand

A shift of the entire demand curve caused by something other than price.

Change in Quantity Demanded

Movement along the demand curve caused only by a change in price.

Price Ceiling

The maximum legal price a seller can charge; set below equilibrium to protect consumers.

Price Floor

The minimum legal price a seller can charge; set above equilibrium to protect producers.

Deadweight Loss

Lost efficiency when total consumer and producer surplus is not maximized.

Black Market

Illegal markets that develop when price ceilings make goods unavailable at legal prices.

Market Efficiency

Achieved when consumer and producer surplus are maximized.

Shifter of Demand

1) Tastes and Preferences

Shifter of Demand

2) Number of Consumers

Shifter of Demand

3) Price of Related Goods (Substitutes)

Shifter of Demand

4) Income

Shifter of Demand

5) Future Expectations

Shifter of Supply

1) Prices/Availability of Inputs (Resources)

Shifter of Supply

2) Number of Sellers

Shifter of Supply

3) Technology

Shifter of Supply

4) Government Action (Taxes & Subsidies)

Shifter of Supply

5) Expectations of Future Profit