AP Micro Unit 2

5 Determinants/Shifters of Demand

1. Tastes and Preferences

2. Number of Consumers

3. Price of Related Goods

4. Income

5. Future Expectations

Related Goods - Demand

Substitutes - if the price goes up for one, then the demand of the other goes up.

Complements - if the price goes up for one, then the demand of the other goes down.

Income - Demand

Normal Goods (luxuries) - If income goes up, then demand goes up as well (and vice versa).

Inferior Goods - If income goes up, then demand goes down (and vice versa).

5 Determinants/Shifters of Supply

1. Price/availability of inputs (resources)

2. Number of sellers (producers)

3. Technology

4. Government action

   • Taxes decrease

   • Subsidies increase

5. Expectations of Future Profit

Characteristics of Inelastic Demand

1. Few Substitutes

2. Necessities

3. Small Portion of Income

4. Required now, rather than later

5. Elasticity coefficient of less than 1

Characteristics of Elastic Demand

1. Many substitutes

2. Luxuries

3. Large portion of income

4. Plenty of time to decide

5. Elasticity coefficient greater than 1

Percent Change Formula

(new # - old #)/(old #)

Elasticity Coefficient Formula

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

Perfectly inelastic

Coefficient of 0 w/ a vertical demand curve.

Unit Elastic

Coefficient of 1

Characteristics of Inelastic Supply

1. Hard to Produce

2. High barrier to entry (few firms)

3. High cost to produce or specialized inputs

4. Hard to switch from producing all goods

5. Elasticity coefficient <1

Characteristics of Elastic Supply

1. Easy to produce

2. Low barrier to entry

3. Low cost or generic inputs

4. Easy to switch production

5. Elasticity coefficient >1

Cross-Price Elasticity of Demand

% change in quantity of “b” / % change in price of “a”

If there’s a positive elasticity coefficient, the goods are substitutes and if it’s negative the goods are complements.

Income Elasticity of Demand

% change in quantity / % change in income

Positive elasticity coefficient means it’s a normal good and a negative elasticity coefficient means it’s an inferior good.