AP Micro -- Unit 2

law of demand

law of demand

as the price of a good falls, people will demand more

price is the determinant of

quantity purchased

shifts in demand

tastes and preferences

substitutes

complements

income levels

inferior goods

more income = less demand (people only want it when they have no money)

law of supply

as price goes up, quantity supplied goes up

supply shifts

production costs

amount of profit in market

disasters

input costs

wages, materials, energy, time, etc

price elasticity

measure of how much Q_D responds to price change

elasticity

∆% Q_D

---

∆% P

elasticity > 1

elastic

elasticity < 1

inelastic

elasticity = 1

unit elastic

∆%

(2nd - 1st) / 1st

supply elasticity

how much Q_s changes relative to price

inelastic supply

fixed amount supplied (e.g. seats at a football stadium)

elastic supply

amount offered changes based on price/demand (e.g. movie theaters)

supply elasticity eq

Q_D / $

income elasticity

how much demand changes when there is a change in income

income changes, Q_D stays the same

income inelastic

income changes, Q_D changes

income elastic

income elasticity < 1

inelastic

income elasticity > 1

elastic

cross price elasticity positive

substitutes

cross price elasticity negative

complements

consumer surplus

consumer pays less than the max price they are willing to pay for a good

producer surplus

producer charges more than the lowest price they would take for a good

price ceiling

maximum price

price floor

minimum price

per-unit tax

fixed amount on every unit sold, paid to government by seller

creates S_tax and DWL

lump-sum tax

total amount paid to government by seller

doesn’t impact supply

reduces profit

buyer pays more of a tax

inelastic demand

producer pays more of a tax

elastic demand