AP Microeconomics Unit 2: Supply and Demand

This set of flashcards covers key concepts from AP Microeconomics Unit 2, focusing on supply and demand, elasticity, market equilibrium, and government intervention.

What does the Law of Demand state about quantity demanded and price?

A decrease in the price of goods causes an increase in quantity demanded, or an increase in price causes a decrease in quantity demanded.

What is the substitution effect?

When the price of a good decreases, consumers substitute this good for goods that are relatively more expensive. Conversely, when the price increases, consumers substitute to less expensive goods.

What are normal goods?

Goods for which demand increases as income increases.

What characterizes inferior goods?

Inferior goods are those for which demand decreases as income increases.

What causes a shift in demand to the right?

An increase in demand can result from an increase in income (for normal goods), price changes of substitutes or complements, the number of buyers, expectations, or changes in styles/tastes.

What is the Profit Motive in supply economics?

It refers to the tendency of producers to increase output when market prices rise, as it becomes more profitable.

What happens to market supply when production costs decrease?

When production costs decrease, supply increases.

What is the Price Elasticity of Demand?

It measures how responsive the quantity demanded is to changes in price.

What does a Price Elasticity of Demand greater than 1 indicate?

It indicates that demand is relatively price elastic.

What will happen to total revenue if price increases and demand is inelastic?

Total revenue will increase.

What does the Cross-Price Elasticity of Demand measure?

It measures how the demand for one good is affected by the price change of another related good.

What is consumer surplus?

The difference between the buyer’s willingness to pay and the price they actually pay.

Define deadweight loss (DWL).

Loss of efficiency when the optimal quantity is not produced, represented by the loss of total consumer and producer surplus.

What is a binding price ceiling?

A legal maximum on the price of a good, which must be set below equilibrium price to have an effect.

What occurs when there is a surplus in the market?

It occurs when the price is higher than equilibrium, resulting in quantity supplied exceeding quantity demanded.

What is protectionism in international trade?

The government's use of tariffs, quotas, and embargoes to protect domestic producers from foreign competition.

What is a tariff?

A tax imposed on imports to raise their price, affecting consumer behavior and domestic production.