AP Microeconmics Unit 2

Quantity Demanded

the actual amount of a good or service consumers are willing and able to buy at some specific price; shown as a single point in the **demand schedule** or along a demand curve - movement along **demand curve**

Law of Demand

states that a higher price for a good or service, other things being equal, leads people to demand a smaller quantity of that good or source

Change in Demand

a shift of the demand curve, which changes the quantity demanded at any given price - shift in the demand curve

* things that cause this change include:
* changes in taste
* the price of related goods or services
* income
* # of consumers
* expectations, etc.

Complements

goods that in some sense are consumed together:

* smartphones + apps, cars + gas, paper + pencils

Substitutes

if a rise in the price of one good makes the consumer more willing to buy the other good

* jeans v. khakis

Normal Goods

when a rise in income increases the demand for a good; most goods

Inferior Goods

when a rise in income decreases the demand for a good; usually considered less desirable than more expensive alternations

Substitution Effect

the change in the quality of a good demanded as the consumer substitutes the good that has become relatively cheaper for the good that has become relatively more expensive

* Great Value v. Name Brand

Income Effect

the change in the quality of a good demanded that results from a change in the consumer’s purchasing power when the price of the good changes

Quantity Supplied

the actual amount of a good or service people are willing to sell at some specific price

Law of Supply

states that, other things being equal, the price and quantity supplied of a good are positively related

* price increase >>> quality increase (cars)

Change in Supply

a shift of the **supply curve**, which changes the **quantity supplied** at any given price

* things that cause this to change include:
* input prices
* the price of related goods or services
* producer expectations
* the number of producers
* technology

Input

a good or service used to produce another good or service

* the cream, sugar + vanilla beans for ice cream

Equilibrium Price

the price of a good at which the **quantity demanded** of that good equals the **quantity supplied** of that good; aka the **market-clearing price**

Equilibrium Quantity

the quantity of a good brought and sold at it’s equilibrium price

Indeterminate Changes

indicates that the change in either price or quantity is known when the market experiences simultaneous shifts in both the demand and supply curves

* ex. an increase in supply and demand causes an increase in quantity exchanged

Surplus

when the **quantity supplied** of a good or service exceeds the **quantity demanded**; occurs when the price is above the **equilibrium** level; aka **excess supply**

* ex. food in a grocery store

Shortage

when the quantity of a good or service demanded exceeds the **quantity supplied**; occurs when the price is below its equilibrium level; aka **excess demand**

* ex. gas shortage

Consumer Surplus

the net gain received from purchasing a good or service; often used to refer to both **individual** and **total**

* ex. you buy a ticket to Disney, you expect to pay $300 but you only pay $100, $200 is the ___________
* WTP - Pe = CS

Producer Surplus

the net gain to a seller from selling a good; equal to the difference between the prices received and the seller’s cost, refers to both **individual** and **total** ___________

* Pe - WTS = PS

Price Elasticity of Demand

the ratio of the percentage change in the quantity demanded to the percent change in the price as we move along the demand curve (absolute values)

Midpoint Method

a technique for calculating the percent change by dividing the change in a **variable** by the average or midpoint, of the initial and final values of that variable

* % change of X = (change of X/ average X) \* 100

Elastic

(demand) when the price elasticity of demand is greater than 1; fall in price increases total revenue

* more flat demand curve

Inelastic

(demand) when the price elasticity of demand is less than 1; a fall in price reduces total revenue

* steep demand curve

Unit Elastic

(demand) when the price elasticity of demand is exactly 1; fall in price doesn’t effect total revenue

* normal demand curve

Perfectly Elastic

when any price increases will cause the **quantity demanded** to drop to zero; the **demand curve** is a **horizontal line**

Perfectly Inelastic

when the quantity demanded does not respond at all to changes in the price; the demand curve is a **vertical line**

Total Revenue

the total value of sales of a good or service; equal to the price multiplied by the quantity sold

* % change of P > % change of Qd is **inelastic**
* % change of P < % change of Qd is **elastic**
* % change of P = % change of Qd is **unit elastic**

SPLAT - substitutions, proportion of income, luxury of necessity, addictive or habit forming, time (urgent - leads to inelastic)

Determinants of Demand Elasticity

Cross-Price Elasticity of Demand

(between two goods) measures the effect of the change in one good’s price on the quantity demanded of another good

* X = % change in the quantity of A demanded / % change in the price of B

Income Elasticity of Demand

measures how changes in income affect the demand for a good; it indicates whether a good is normal or inferior and specifies how responsive demand for a good is to changes in income

* X = % change in quantity demanded/ % change in income

Price Elasticity of Supply

a measure of the responsiveness of the quantity of a good supplied to changes in the price of that good

* X = % change in quantity supplied / % change in price
* determinants: the availability of inputs, time

Price Ceiling

a maximum price that sellers are allowed to change for a good service

Price Floor

a minimum price that buyers are required to pay for a good or service

Quantity Controls

an upper limit on the quantity of some good that can be bought or sold; aka a **quota**

License

gives it’s owner the right to supply a good or service; a form of **quantity control** as only those who are licensed can supply the good or service

Demand Price

the price of a given quantity at which consumers will demand that quantity

Supply Price

the price of a given quantity at which producers would supply at different prices

Wedge

the difference between the **demand price** and the **supply price** of a good, such that the price paid by buyers ends up being higher than the recieved by the sellers; often created by **quantity control** or **quota**

Deadweight Loss

the value of foregone mutually beneficial transactions; (from a tax) the decrease in **total surplus** resulting from the tax, minus the tax revenues generated

Excise Tax

a tax on sales of a particular good or service

* ex. fuel, alcohol, tobacco - causes supply curve to shift up

Lump-Sum Tax

a tax of a fixed amount paid by all taxpayers, independent of the taxpayers income

* ex. Switzerland’s tax on foreigners living there who do not earn income in Switzerland

Tax Incidence

a measure of who really pays a tax

Deadweight Loss

the value of foregone mutually beneficial transactions; (from a tax) the decrease in total surplus resulting from the tax, minus the tax revenues generated