AP Microeconomics Unit 2 Exam Review

Quantity supplied

amount that will be sold at a specific price

point on the curve

Supply

quantities producers are willing to sell at various prices at a specified time, Ceteris Paribus

Increase in supply

rightward shift of the supply curve

Decrease in supply

leftward shift of the supply curve

What are the determinants of supply

change in number of suppliers

change in input costs

change in the physical availability of resources

change in technology in the long run

change in expected future prices by supplier

change in gov't regulations, taxes

Quantity demanded

amount that will be bought at a specific price

point on the curve that is changed by price

Demand

prices consumers are willing to pay at a specified time, Ceteris Paribus

What conditions must be met to count as 'demand'

being both willing to and able to purchase a good or service

What are the determinants of demand

change in the number of consumers

change in income (Y) normal goods (YED > 0)

change in income (Y) inferior goods (YED < 0)

change in taste or preferences

change in the price (P) of a substitute (XED > 0)

change in the price (P) of a complement (XED < 0)

change in expected future prices (EFP) by consumers

change in expected future income (EFY) of consumers

equilibrium price

price paid or received at the equilibrium quantity

equilibrium quantity

quantity bought and sold at the equilibrium price

Increase in demand

rightward shift of the demand curve

Decrease in demand

leftward shift of the demand curve

Income effect

when the price decreases for a product consumers can afford to buy more with the same income and vice versa

Substitution effect

when a closely-related product is at a lower price consumers have the incentive to buy what is now a less expensive good for similar products that are now relatively more expensive

Diminishing marginal utility

when a consumer purchases more of a good or service, the satisfaction received goes down; consumer will continue to purchase if the price goes down

Marginal utility

additional satisfaction obtained from acquiring one more unit of a product

Total utility

total amount of satisfaction obtained from consumption of a good or service

Utility

satisfaction or usefulness that is measured in utils

Elastic demand

consumers are sensitive to small changes in price as it causes major effects on the quantity demanded; relatively flat curve with a negative slope; PED or PES > 1

Inelastic demand

consumers are insensitive to small changes in price as it causes little effect on the quantity demanded; usually a necessity; relatively steep curve with a negative slope; PED or PES < 1

Characteristics of elastic goods/services

many substitutes

luxuries

large portion of income

plenty of time to decide (long run)

easy to manufacture

Characteristics of inelastic goods/services

few or no substitutes

necessities

small portion of income

required now, rather than later (short run)

not easy to manufacture

Total revenue test

Check to see how elasticity shows changes in price will affect total revenue

Total revenue

total amount of money a firm receives by selling goods or services

change in total revenue retained by producers is negative

total revenue = price × quantity

total revenue ≠ profit

Total expenditure

total amount of money a consumer spends by buying goods or services; total expenditure = price × quantity

Unit elastic

percentage change in price and quantity demanded are the same

PES or PED = 1

Price elasticity of demand

measure of how consumers react to a change in the price of a good (decimal value)

PED = (%ΔQd / %ΔP)

%ΔQd = (|ΔQ| / ([Q₁ + Q₂]/2))

%ΔP = (|ΔP| / ([P₁ + P₂]/2))

Marginal revenue

additional income from selling one more unit of a good

MR = (ΔTR / ΔQ)

Income elasticity

sensitivity of quantity demand relative to changes in income (decimal value)

YED = (%ΔQd / %ΔY)

cross-price elasticity of demand

measures the responsiveness of demand for a product following the change in the price of another related product (decimal value); XED = (%ΔQd of B / %ΔP of A)

Price elasticity of supply

measure of how much the quantity supplied of a product responds to a change in price and how quickly firms can ramp up production (decimal value); supply inelastic in the short run and more elastic in the long run

Law of supply

when prices rise, quantity supplied rises and when prices fall, quantity supplied falls, ceteris paribus

Law of demand

when prices fall, quantity demanded rises and when prices rise, quantity demanded falls, ceteris paribus

Perfectly elastic

change in price causes an infinite change in the quantity demanded; PES or PED = ∞

Perfectly inelastic

price is the same at any quantity demanded; PES or PED = 0

Welfare economics

study of how the allocation of resources affects economic well-being

Individual consumer surplus

buyer's willingness to pay minus the amount the buyer actually pays for it and measures benefit that the buyers receive as they perceive it

Market consumer surplus

sum of individual consumer surplus; indicated by the whole triangle above the price and below the demand curve

Individual producer surplus

amount a seller is paid for a product minus the seller's cost and measures the benefit to sellers participating in the market

Total surplus

sum of consumer surplus and producer surplus

Market producer surplus

sum of individual producer surplus; indicated by the whole triangle below the price and above the supply curve

Efficiency

property of a resource allocation of maximizing the total surplus received by all members of society

Market efficiency

when a market is capable of producing output high enough to meet consumer demand

Market

institution that allows buyers and sellers to exchange goods and services

Utility-maximizing rule

principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility

Market equilibrium

point where resources are efficiently allocated; Qs = Qd

Price floor

minimum price that can be legally charged for a product that occurs when the government sets a price above the equilibrium price

effective price floors lead to a surplus (Qs - Qd)

Price ceiling

maximum price that can be legally charged for a product that occurs when the government sets a price below the equilibrium price

effective price ceilings lead to shortages (Qd - Qs) and black market activity

Dead Weight Loss (DWL)

reduction in economic surplus resulting from a market not being in competitive equilibrium (allocative inefficiency)

Excise tax

per unit tax applied to specific items, such as luxury or undesirable goods; shifts supply curve to the left with a more inelastic curve having a larger tax burden paid by consumer

Marginal utility per price

utility per price that the consumer gets from an extra unit of a good or service

Short run

period of time during which at least one of a firm's inputs is fixed; equilibrium price is lower; more immediate

Long run

period of time in which a firm can vary all its inputs; equilibrium price is higher; in the future