AP Microeconomics Unit 2

Demand

The willingness and ability to purchase a good or service at different prices.

Law of Demand

States that as the price of a good increases, the quantity demanded decreases, creating an inverse relationship between price and quantity demanded.

Demand Curve

A downward-sloping curve that shows the relationship between price and quantity demanded.

Determinants of Demand

Factors that shift the demand curve, including income, prices of related goods, tastes and preferences, expectations, and number of buyers.

Normal Goods

Goods for which demand increases as income rises.

Inferior Goods

Goods for which demand decreases as income rises.

Substitutes

Goods that can replace each other; a rise in the price of one increases demand for the other.

Complements

Goods that are consumed together; a rise in the price of one decreases demand for the other.

Changes in Quantity Demanded

Movement along the demand curve caused by a price change.

Changes in Demand

Shift of the entire demand curve caused by non-price factors like income and tastes.

Price Elasticity of Supply (PES)

Measures how much quantity supplied changes in response to price changes.

Elastic Supply

Supply where quantity supplied changes more than the price change (PES > 1).

Inelastic Supply

Supply where quantity supplied changes less than the price change (PES < 1).

Unit Elastic Supply

Supply where quantity supplied changes proportionally to price (PES = 1).

Perfectly Inelastic Supply

Supply that remains unchanged regardless of price (PES = 0).

Perfectly Elastic Supply

Supply that changes infinitely with a tiny price change (PES = ∞).

Determinants of Price Elasticity of Supply

Factors that affect how elastic the supply is, including substitutes, timeframe, income share, luxury vs. necessity, and narrowness of market.

Price Ceilings

A legal maximum price set below the equilibrium price, preventing prices from rising to their natural market level.

Binding Price Ceiling

A price ceiling that is set below the equilibrium price and results in a shortage.

Price Floors

A legal minimum price set above the equilibrium price, preventing prices from falling to their natural market level.

Binding Price Floor

A price floor that is set above the equilibrium price and results in a surplus.

Deadweight Loss

The loss of total surplus that occurs when the market is not in equilibrium due to interventions like price ceilings or floors.

Tax Incidence

Determines how the burden of a tax is divided between consumers and producers.

Subsidies

Financial assistance provided by the government to encourage the production or consumption of particular goods or services.

Benefits of Trade

Trade allows countries to specialize in producing goods where they have a comparative advantage, leading to greater efficiency and increased total surplus.

World Price

The price of a good in the international market.

Domestic Price

The price of a good in a country without trade.

Imports

Goods that a country purchases from foreign producers.

Exports

Goods that a country sells to foreign consumers.

Tariffs

Taxes imposed on imported goods, raising their price.

Quotas

Legal limits on the quantity of a good that can be imported.

Deadweight Loss from Trade Restrictions

Losses associated with tariffs and quotas that reduce the efficient level of trade.

Arguments for Trade Restrictions

Reasons countries may impose restrictions on trade, including protecting domestic jobs and national security.

Market Equilibrium

Occurs when quantity demanded equals quantity supplied.

Disequilibrium

A situation where quantity demanded does not equal quantity supplied, leading to shortages or surpluses.

Shortage

Occurs when quantity demanded exceeds quantity supplied.

Surplus

Occurs when quantity supplied exceeds quantity demanded.

Equilibrium Adjustment Process

The gradual move toward a new equilibrium when demand or supply shifts.

Increase in Demand

A rightward shift of the demand curve, leading to a higher equilibrium price and quantity.

Decrease in Demand

A leftward shift of the demand curve, leading to a lower equilibrium price and quantity.

Increase in Supply

A rightward shift of the supply curve, leading to a lower equilibrium price and a higher quantity.

Decrease in Supply

A leftward shift of the supply curve, leading to a higher equilibrium price and a lower quantity.