AP Micro Unit 2

Law of Demand

The principle that, all else being equal, an increase in price results in a decrease in quantity demanded.

Substitution Effect

Economic understanding that as prices rise or income decreases, consumers will replace more expensive items with less costly alternatives.

Income Effect

The change in quantity demanded due to a change in the consumer's purchasing power when the price of a good changes.

Giffen Goods

Goods that absorb a large share of consumer’s budgets and are inferior goods, where demand increases as prices rise.

Veblen Goods

Goods for which people's preference increases as the price increases, associated with conspicuous consumption.

Perfectly Inelastic Demand

A situation where the price elasticity of demand is zero, resulting in quantity demanded that does not change regardless of price changes.

Perfectly Elastic Demand

A situation where price elasticity of demand is infinite, and a small increase in price causes quantity demanded to drop to zero.

Price Elasticity of Demand

The ratio of the percentage change in quantity demanded to the percentage change in price.

Total Revenue

The total value of sales of a good or service, calculated as Price multiplied by Quantity sold.

Income Elasticity of Demand

The percent change in quantity demanded of a good divided by the percent change in consumer income, used to classify goods as normal or inferior.

Cross-Price Elasticity of Demand

A measure of how the quantity demanded of one good changes in response to a price change in another good, indicating if they are substitutes or complements.

Consumer Surplus

The difference between the maximum price consumers are willing to pay for a good and the price they actually pay.

Producer Surplus

The difference between the price producers receive for a good and the minimum price they are willing to accept, representing the benefit to producers.

Marginal Utility

The additional satisfaction a consumer derives from consuming one more unit of a good or service.

Budget Constraint

The limit on the consumption bundles that a consumer can afford, given their income and the prices of goods.

Marginal Cost

The additional cost incurred from producing one more unit of output.

Average Total Cost

Total cost divided by the quantity of output produced, also known as average cost.

Economies of Scale

The cost advantages that firms experience as production increases, leading to a decrease in average total costs.

Sunk Cost

A cost that has already been incurred and cannot be recovered; should be ignored in future decision-making.