AP Microeconomics Unit 2 Review

normal goods

goods sensitive to purchasing power; direct relationship with income; as income increases, the demand for these goods increases; as income decreases, the demand for these goods decreases

inferior goods

goods sensitive to purchasing power; indirect relationship with income; as income increases, the demand for these goods decreases; as income decreases, the demand for these goods increases

demand

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

law of demand

there is an indirect relationship between price and quantity demanded

substitution effect

if the price goes up for a product, consumers will buy less of that product and more of another substitute product

substitutes

goods that are used in place of one another; direct relationship

complements

two goods that are bought and used together; inverse relationship

income effect

if the price goes down for a product, the purchasing power increases for consumers -- allowing them to purchase more

law of diminishing marginal utility

as you consume anything, the additional satisfaction you receive from each additional unit will eventually decrease

law of diminishing marginal utility and law of demand

the law of diminishing marginal utility causes the inverse relationship as consumers are willing to pay more for a unit that offers them the most benefit, while the amount they demand and are willing to pay for decreases as it does not offer as much utility

market demand

the demand of the entire population (add the market - adding the individual demands)

5 shifters of demand

1. Tastes and Preferences

2. Number of Consumers

3. Price of Related Goods

4. Income

5. Future Expectations (how will what happens in the future, impact demand right now)

law of supply

there is a direct relationship between price and quantity supplied

supply

the different quantities of a good that sellers are willing and able to sell (produce) at different prices

5 shifters of supply

1. Prices/Availability of Inputs (Resources)

2. Number of Sellers

3. Technology

4. Government Actions (Taxes, Subsidies)

5. Expectations of Future Profit

why doesn't price shift the curve

changes in price only cause movement along the curve because demand and supply addresses the quantities demanded or supplied at different price points

equilibrium

where supply and demand intersect, producing the optimum price and quantity

shortage

when quantity demanded is greater than quantity supplied, resulting in higher prices

surplus

when quantity supplied is greater than quantity demanded, resulting in lower prices

double shift rule

if two curves shift at the same time, either price or quantity will be intermediate

price above equilibrium

surplus occurs; price floor forms

price below equilibirum

shortage occurs, price ceiling forms

consumer surplus

the difference between what a consumer is willing to pay and what they actually pay

producer surplus

the difference between what a producer receives and what they were willing to sell for

elasticity of demand

describes how sensitive quantity is to a change in price

elasticity of supply

describes how sensitive quantity supplied is to a change in price

total revenue test

uses elasticity to show how changes in price will affect total revenue

inelastic demand

quantity is insensitive to a change in price; people will continue to buy the good even as price changes

inelastic goods

few substitutes, small portion of income, necessities

elastic demand

quantity is sensitive to a change in price; people will buy more or less amounts of the good as the price changes

elastic goods

many substitues, luxury items, large portions of income

perfect inelastic

coefficient = 0; you need a product and will pay anything for it, ex. insulin

relatively inelastic

coefficient = <1; steep curve; direct relationship witht total revenue

unit elastic

coefficient = 1; no changes in total revenue in response to changes in price

relatively elastic

coefficient = >1; indirect relationship with total revenue

perfectly elastic

coefficient = ∞

cross price elasticity of demand

shows how sensitive a product is to a change in a price of another good; shows if two goods are substitutes or complements

income elasticity of demand

shows how sensitive a product is to a change in income; shows if goods are normal or inferior

price elasticity of supply

shows how sensitive producers are to a change in price; alternative to total revenue test

price ceiling

the maximum legal price a seller can charge for a product; must be below equilibrium to be effective; result in black markets, caused by shortage

price floor

the minimum legal price a seller can sell a product; must be above equilibrium to be effective; result in surplus

deadweight loss

the lost consumer surplus and producer surplus caused by inefficiency

world price

countries can buy products at their own domestic price or they can buy the products at a cheaper world price

tariff

a tax on imports that increase the world price

quota

a limit on the number of imports

purpose of tarriffs and quotas

to protect domestic producers from a cheaper world price and to prevent domestic unemployment; if you have a shortage you will import goods

excise tax

a per unit tax on producers that encourages them not to produce goods the government deems "bad"; shift supply upwards

tax incidence - perfectly inelastic

tax completely on consumers

tax incidence - relatively inelastic

tax mostly on consumers

tax incidence - unit elastic

tax shared by producers and consumers

tax incidence - relatively elastic

tax mostly on producers

tax incidence - perfectly elastic

tax completely on producers