AP Microeconomics Unit 2: Market Dynamics & Elasticity

Demand

Refers to the different quantities of goods/services that consumers are willing and able to purchase at different prices at a specific time.

Law of Demand

States that there is an inverse relationship between price and quantity demanded.

Downward sloping

Describes the Demand curve, where price increases lead to a decrease in quantity demanded.

Substitution Effect

When the price of Good A increases, consumers switch to a cheaper substitute, decreasing the quantity demanded of Good A.

Income Effect

As the price of a good decreases, consumer's purchasing power increases, allowing them to buy more.

Law of Diminishing Marginal Utility

As consumers consume more units of a good, the additional satisfaction decreases, causing a willingness to buy only at lower prices.

Change in Quantity Demanded

A movement along the demand curve caused only by a change in the product's own price.

Change in Demand

A shift of the entire demand curve caused by non-price determinants.

Determinants of Demand

Factors that cause shifts in the demand curve, remembered by the mnemonics MERIT or TRIBE.

Tastes and Preferences

Consumer preferences can shift demand right for positive trends and left for negative reports.

Related Goods

Prices of substitutes and complements that can affect demand; substitutive relationship is direct, while complementary is inverse.

Normal Goods

Goods for which demand increases as income rises (e.g., new cars, steak).

Inferior Goods

Goods for which demand decreases as income rises (e.g., ramen noodles, used clothes).

Buyers (Number of)

An increase in the number of buyers shifts the demand curve to the right.

Expectations (Demand)

If consumers expect prices to rise, they may increase demand today.

Supply

Refers to the quantities of goods/services that sellers are willing and able to sell at different prices.

Law of Supply

States that there is a direct relationship between price and quantity supplied.

Upward sloping

Describes the Supply curve, where price increases lead to an increase in quantity supplied.

Profit Incentive

Higher prices signal higher potential profits, encouraging firms to produce more.

Increasing Marginal Costs

Higher production quantities often lead to higher per unit costs, necessitating higher prices to cover costs.

Determinants of Supply

Factors that cause shifts in the supply curve, remembered by the mnemonics TRICE or ROTTEN.

Technology

Advancements that increase efficiency and lower costs, shifting supply right.

Related Goods (Supply)

If a producer can sell one good for more, they may reduce supply of another good.

Input Costs

If the cost of labor or materials rises, supply shifts left.

Competition (Number of Sellers)

More firms in the market increase supply, shifting the supply curve to the right.

Expectations (Supply)

If producers expect prices to rise, they may reduce current supply to sell later.

Taxes

Considered an input cost that can shift supply left.

Subsidies

Financial support from the government that can shift supply right by lowering production costs.

Equilibrium Price

The price at which the quantity of demand equals the quantity of supply.

Surplus

A situation where quantity supplied exceeds quantity demanded at a given price.

Shortage

A situation where quantity demanded exceeds quantity supplied at a given price.

Market Signals

Information that market participants use to make decisions; prices act as signals.

Elasticity of Demand

A measure of how much the quantity demanded responds to changes in price.

Perfectly Inelastic Demand

Demand that does not change with price, typically represented as a vertical demand curve.

Perfectly Elastic Demand

Demand that changes infinitely with price, typically represented as a horizontal demand curve.

Consumer Surplus

The difference between what consumers are willing to pay for a good versus what they actually pay.

Producer Surplus

The difference between the amount producers receive from selling a good versus the minimum amount they are willing to accept.

Price Ceiling

A legal maximum price that can be charged for a good, often leading to shortages.

Price Floor

A legal minimum price that must be paid for a good, often leading to surpluses.

Comparative Advantage

The ability of an individual or group to carry out a particular economic task more efficiently than another activity.

Opportunity Cost

The cost of foregoing the next best alternative when making a decision.

Marginal Cost

The cost of producing one more unit of a good.

Marginal Utility

The additional satisfaction or benefit received from consuming one more unit of a good.

Factors of Production

Resources used in the creation of goods and services; typically categorized as land, labor, capital, and entrepreneurship.

Market Structure

The organizational characteristics of a market, influencing the behavior of firms in the market.