AP Microecon Unit 2 Test Review

Law of Demand

as the price of good or service increases, quantity demanded decreases, and vice versa

relationship between price and quantity demanded

demand curves

inverse relationship - curve slopes downward

change of price in exact product does not shift curve, only causes movement on existing curve

use demand schedule to create curve

substitute goods

two alternatitve goods that can be used for the same purpose

have opposite demands. as one increases demand, the other decreases

consumers go for cheaper substitute

complement goods

goods that are bought and used together

have joint demand. as one increases demand, the other also increases, and vice versa

Any factor other than _______ will shift the demand curve

price of a product

increase in demand shifts curve to the ______

right

decrease in demand shifts curve to the ____

left

Law of Supply

as the price of a good or service increases, the quantity supplied will also increase, and vice versa

relationship between price and quantity supplied

supply curves

direct relationship - curve slopes upward

change of price in exact product does not shift curve, only causes movement on existing curve

use supply schedule to create curve

Any factor that _______ cost of production decreases overall supply

increases

Any factor that ______ cost of production increases overall supply

decreases

Any factor other than ______ will shift the supply curve

price of the product

increase in supply shifts curve to the _____

right

decrease in supply shifts curve to the ____

left

price elasticity of demand

measures strength of consumer response to change in the price of the product, or how likely we are to respond to a change in price

price elasticity of demand formula

% change in quantity demanded/% change in price

drop the negatives!

interpreting price elasticity of demand and supply

if answer is:

>1, it is elastic

<1, it is inelastic

=1, it is unitelastic

total revenue formula

price x quantity demanded

price and total revenue move in opposite directions

PE of demand is elastic

price and total revenue move in opposite directions

PE of demand is inelastic

total revenue is unaffected by a change in price

PE of demand is unitelastic

determinants of price elasticity of demand

presence of substitutes (more subs = more elastic)

amount of income spent (more spent = more elastic)

nature of good/service (necessities = inelastic, wants = elastic)

income elasticity of demand

price elasticity of supply

indicates how strongly producers of a good respond to change in price

price elasticity of supply formula

% change in quantity supplied/% change in price

income elasticity of demand

measured by percent change in quantity demanded divided by change in consumer income

used to determine whether a good is normal or inferior

income elasticity of demand formula

% change in quantity demanded/% change in income

keep negative signs!

income elasticity coefficient positive

normal good

income elasticity coefficient negative

inferior good

cross price elasticity of demand

measured by percent change in quantity demanded of one good divided by percent change in price of another good

used to determine if goods are substitutes, complements, or not related

cross price elasticity formula

% change in quantity demanded of Good A/% change in price of Good B

cross price elasticity coefficient positive

goods are substitutes

cross price elasticity coefficient negative

good are complements

market equilibrium

condition in a market where quantity supplied equals quantity demanded at an optimal price

where supply and demand curves meet

consumer surplus

difference between amount consumers are willing to pay vs total amount they actually pay

two types: individual consumer surplus and total consumer surplus

individual consumer surplus

difference between a buyer’s max price and what market price is

total consumer surplus

all individual CS added together

identified on supply and demand graph as the triangle above the equilibrium price

formula: ½BH

producer surplus

difference between total amount firms are willing and able to sell for and total amount they actually received when selling

two types: individual producer surplus and total producer surplus

individual producer surplus

difference between seller’s minimum price and the equilibrium price that good/service is sold for in the market

total producer surplus

composed of all indiv. PS added up

identified on supply and demand curve as the triangle below equilibrium price (because cost of producing is lower than what is received from selling)

formula: ½BH

When does market surplus occur?

when quantity supplied is greater than quantity demanded

When does market shortage occur?

when quantity demanded is greater than quantity supplied

Four potential shifts in equilbrium

increase demand shifts curve right

decrease demand shifts curve left

increase supply shifts curve right

decrease supply shifts curve left

price ceiling

located below equilibrium

government intervention to keep prices low for consumers

causes shortages because supply line is crossed before demand line (calculate by QD - QS)

price floor

located above equilibrium

government intervention to keep market from charging too low

causes surpluses because demand line is crossed before supply line (calculate by QS - QD)

subsidy

grants from the gov’t as an effort to increase production of a good/service

increases supply and shifts supply curve right

excise tax

tax by gov’t on goods/services deemed to have negative effect on society

decreases supply and shifts supply curve left

tax incidence

helps determine who will bear burden of paying excise tax

demand and supply elastic = tax is evenly split for producers and consumers

demand is more elastic = producers pay more of the tax

demand is more inelastic = consumers pay more of the tax

deadweight loss

total amount of CS and PS lost due to market inefficiency

formula: ½(change in quantity)(change in price)

find deadweight CS, then deadweight PS, then add together for total DWL

international trade

allows countries to expand markets and supply goods that aren’t available domestically

increases variety of goods/services while creating a sense of competition, which lowers prices for consumers

cheaper to trade than produce domestically

public policy

laws and regulations that govern economic activity

ex: quotas and tariffs

quotas

gov’t imposed limitations on production levels

often used as a trade barrier to protect domestic industries producing same product

tariffs

taxes on foreign goods coming into the country

reduce amount of good coming to a country by raising the price of the good

When is total economic surplus maximized?

at equilibrium