AP Microecon 2.7-2.9 Study Guide

What are the 5 things that shift the demand curve?

Income, Price of Related Goods, Expectations, Taste, Number of Buyers

Income, Price of Related Goods, Expectations, Taste, Number of Buyers shift which curve?

Demand

Income shifts which curve?

Demand

Taste shifts which curve?

Demand

Number of Buyers shifts which curve?

Demand

Expectations shifts which curve?

Demand and Supply

Price of Related Goods shifts which curve?

Demand and Supply

What causes the supply curve to shift?

Input Prices, Technology, Expectations, Number of Sellers, Price of Related Goods

Input Prices, Technology, Expectations, Number of Sellers, Price of Related Goods shifts which curve?

Supply

Input Prices shifts which curve?

Supply

Technology shifts which curve?

Supply

Number of Sellers shifts which curve?

Supply

What happens to Price and Quantity when demand increases?

Higher price and Higher quantity

When price and quantity both go up, which curve has shifted?

Demand shifts to the right

When price and quantity both go down, which curve has shifted?

Demand shifts to the left

What happens to price and quantity when demand decreases?

Price and quantity both decrease

What happens to price and quantity when supply increases?

Price decreases and quantity increases

When price decreases and quantity increases which curve shifts?

Supply shifts to the right

What happens to price and quantity when supply decreases?

Price increases and quantity decreases

When price increases and quantity decreases which curve shifts?

Supply shifts to the left

What happens to price and quantity when both supply and demand increase?

Price is indeterminate and quantity increases

When quantity increases but price is indeterminate, what shifts happen?

Supply and Demand both shift to the right

What happens to price and quantity when both supply and demand decrease?

Price is indeterminate and quantity decreases

When quantity decreases and price is indeterminate what shifts happen?

Both supply and demand shift to the left

What happens to price and quantity when supply increases and demand decreases

Price decreases and quantity is indeterminate

When price decreases and quantity is indeterminate what shifts have happened?

Supply has shifted right and demand has shifted left

What happens to price and quantity when supply decreases and demand increases?

Price increases and quantity is indeterminate

When price increases and quantity is indeterminate, what shifts happened?

Supply shifts left and demand shifts right

When there is greater quantity supply in a market than quantity demand what occurs?

A surplus

What conditions create a surplus in a market?

When quantity supplied is greater than quantity demanded

How does a market resolve a surplus?

Price is decreased until equilibrium is established

When there is greater quantity demand than quantity supplied what occurs?

A shortage

What conditions create a shortage in a market?

When quantity demanded is greater than quantity supplied?

How does a market resolve a shortage?

Price is increased until equilibrium is established

What is a price ceiling?

A legal maximum on the price at which a good can be sold

A legal maximum price at which a good can be sold is a?

Price Ceiling

What is a price floor?

A legal minimum on the price at which a good can be sold

A legal minimum on the price at which a good can be sold is a?

Price Floor

What makes a price control binding?

When a price floor is above equilibrium price or a price ceiling is below equilibrium price

When a price floor is above equilibrium price or a price ceiling is below equilibrium price what is this known as?

Binding Price Control

What problems are created by binding price controls?

They create either surpluses or shortages in a market that cannot be resolved through a change in price

Why do governments put price controls in place?

They feel a market price is unfair

What is a subsidy?

A government payment that supports a business or market

A government payment that supports a business or market is a?

Subsidy

What is an Excise Tax?

a tax on the production or sale of a good

a tax on the production or sale of a good is a?

Excise Tax

When an excise tax is put in place, what is the price sellers receive?

Find the new equilibrium on the graph, then drop straight down till you hit the original supply curve. Go to the y axis and you will find the price the seller receives

How do you find the size of a tax on a graph?

The difference between the original curve and the new curve with the tax will be the size of the tax

How do you find tax revenue when an excise tax is put in place?

Find the size of the tax and multiply by the quantity sold at the new equilibrium

What is deadweight loss?

the loss in total surplus that occurs whenever an action or a policy reduces the quantity transacted below the efficient market equilibrium quantity

Where is Deadweight Loss found on a graph with an excise tax?

The triangle created where supply and demand come together originally, and the vertical line between the new equilibrium and the original supply curve

What is tax incidence?

the manner in which the burden of a tax is shared among participants in a market

The manner in which the burden of a tax is shared among participants in a market is?

Tax Incidence

How do you find the tax incidence paid by buyers?

The box that is created by the new equilibrium price and the original price in the market

How do you find the tax incidence paid by sellers?

The box that is created between the original price and the new price that the seller receives

What determines who pays the bigger burden of tax incidence

Whoever is more inelastic will pay the bigger portion of the tax

Why does inelasticity explain who pays the bigger burden of a tax?

If you are inelastic, then you will buy or produce the good no matter what. Whereas if you are elastic, you are price sensitive. If the buyer is price sensitive and the producer is inelastic, the producer will lose lots of sales by raising prices, so they absorb the majority of the tax.

What is the world price?

the price of a good that prevails in the world market for that good

the price of a good that prevails in the world market for that good is?

The world price

When the world price is above domestic price?

The country exports the good

A country is an exporter if?

The world price is above domestic price

When the world price is below the domestic price?

The country imports the product

A country is an importer if?

The world price is below the domestic price

What is a tariff

A tax on imported goods

Why would a government put in place a tariff?

They are trying to protect domestic industries against cheaper foreign imports

Who is hurt by a tariff?

Consumers pay higher prices because of a tariff

What does the world price look like on a graph?

A horizontal line at the world price

How do we figure out how many imports come into a country through a graph?

Where the world price hits the supply curve this establishes domestic supply. Where the world price hits the demand curve this is domestic demand. The difference between domestic demand and supply is made up by imports

What does a tariff look like on a graph?

It is a horizontal line above the world price

Where is tax revenue found on a tariff graph?

Find the quantity supplied and quantity demanded where the tariff price hits the supply and demand curves. This is the amount of imports into the country. Then find the difference between the world price and the tariff price

Where is DWL found on a tariff graph?

The triangles on both sides of the tax revenue

What happens to consumer surplus when a tariff is put in place?

Consumer surplus shrinks

What happens to producer surplus when a tariff is put in place?

Producer surplus increases

What is a quota?

A limit on the number of goods that can be imported

A limit on the number of goods that can be imported is?

A quota