AP Micro U2 Key Terms

Law of Demand

suggests that a change in a good/service's own price will cause a change in quantity demanded in the opposite direction, and a movement along the demand curve (marginal benefit curve)

Shifts in Demand

movements of the entire demand curve caused by changed in determinants of consumer demand (other than the good/service's own price)

Law of Supply

suggests that a change in a good/service's own price causes a change in quantity supplied in the same direction and a movement along the supply curve

Substitution Effect

as the price of a good increases, consumer quantity demanded decreases because consumers switch to substitutes

Income Effect

as the price of a good increases, consumer quantity demanded for normal goods decreases because their purchasing power decreases

Shifts in Supply

movements of the entire supply curve caused by changed in determinants of supply (other than the good/service's own price)

Substitute

a good used INSTEAD of another

Complement

a good used WITH another

Normal Good

when income goes up there is an increase in demand for this good

Inferior Good

when income goes up there is a decrease in demand for this good

Giffen Good

a good where an decrease in price decreases quantity demanded (demand slopes up), this is because it is an inferior good with a very strong income effect

Veblen Good

a luxury item where quantity demand increases as price increases because the price signals quality or scarcity to others (conspicuous consumption)

Equilibrium

intersection of supply and demand (the price level where quantity demanded = quantity supplied)

Market Disequilibrium

when there is an imbalance in prices and quantities causing surpluses or shortages

Consumer surplus

the difference between the price consumers and willing to pay and the price they pay. (total ___ is the area below the D curve and above the price, out to the quantity sold)

Producer surplus

the difference between the price the producer is paid and the price they would be willing to take. (total ___ is the area above the supply curve and below the price, out to the quantity sold)

Total surplus

consumer surplus + producer surplus. It is maximized at equilibrium.

Deadweight loss

lost surplus when the market is NOT at equilibrium, loss to buyers and sellers as a result of market disequilibrium

Price Elasticity of Demand

(% change in quantity demanded)/(% change in price)

Price Elasticity of Supply

(% change in quantity supplied)/(% change in price)

Income Elasticity of Demand

(% change in quantity demanded)/(% change in income)

Cross Price Elasticity of Demand

(% change in quantity demanded of good A)/(% change in price of good B)

Price Floor

legal lower limit on the price

Price Ceiling

a legal upper limit on the price

Excise taxes

apply to the sale of particular products, often intended to change behavior as well as generate revenue, it is typically applied per unit

Sales taxes

apply to purchases of many goods and services, typically multiplies the cost of sale times a set tax rate

Subsidies

government grant of money to offset cost

Tax Incidence

impact of the tax on consumer and producer surplus

Tariffs

tax on imported goods or services

Quotas

quantity limit of imported goods or services