Microeconomics Unit 2: Supply and Demand

AP Micromacro - Dawson (Maggie Zhou)

Types of demand (3)

Individual - how much an individual will buy @ certain price (micro)
Market - sum of all individual demands @ certain price (micro)
Aggregate - GDP of all goods + services across all markets (macro)

Law of Demand

Price up, demand down
Demand down, price up

Demand curve slopes ____. Why? (3)

Substitution - consumers will buy other things
Income - consumers will afford less
Law of Diminishing Returns - the more you consume, the less utility (enjoyment)

Change in quantity/supply demanded

Change in price —> move along the curve (NO SHIFT)

Change in demand/supply

Shift of demand/supply curve (shortage / surplus)

Shifts are right/left, never up/down

What causes demand to shift? (5)

Changes in prices of alternatives
Changes in income
Changes in taste
Changes in expectations
Changes in population

Pens and pencils are consumer substitutes. If the price of pens increase, what effect does it have on the pencils?

Demand of pencils increases

Since the price of pens increases, less people want to buy pens—they’d rather buy the cheaper pencils. Therefore, demand of pencils increases.

Pencils and erasers are consumer complements. If the price of erasers increase, what effect does it have on the pencils?

Demand of pencils decreases

Since the price of erasers increases, less people want to buy erasers. Since pencils and erasers are usually bought together, if people buy less erasers, they will also buy less pencils. Therefore, demand of pencils decreases.

What are normal goods?

As income increases, demand for normal goods increases.

What are inferior goods?

As income increases, demand for inferior goods decreases.

Typically, cheap low-quality goods (cup ramen)

If consumers expect a future price rise, demand will ________.

Demand increases

People are afraid prices will rise in the future, so they will buy extra now to “stock up.” If they think the price will drop, demand will decrease because they will want to buy it later, when the price drops.

If there are more consumers/population, demand will ____.

Demand will increase

There’s more people, so more overall demand.

Law of Supply

Price up, supply up.
Price down, supply down.

More supplies are willing to supply because this is more profitable.

What causes supply to shift? (5)

Changes in prices or quantity of input
Changes in prices of related goods (on production side)
Technology
Changes in expectations
Changes in number of producers

Types of input

Labor
Items (raw materials, like milk and sugar for coffee)
Natural resources
Capital
Entrepreneurship

*Both price and quantity matter here

Beef and leather are producer complements. If the price of beef increases, what effect does it have on the leather?

Leather supply increases

If the price of beef increases, it’s quantity supplied will increase because it is more profitable. Since beef and leather and produced from the same thing (cows), there will be more leather supply since the suppliers already are using the cows for beef.

Almonds and oranges are producer substitutes. If the price of almonds increases, what effect does it have on oranges?

Orange supply decreases

If the price of almonds increases, then supply of it will increase because it is more profitable for suppliers. Since the suppliers would rather produce almonds over oranges, they will naturally produce less oranges.

What do technological advancements do?

Increase supply

If suppliers expect demand will rise, what will they do?

Increase supply

Sketch/visualize a supply demand curve (don’t forget axis and labels!)

Y - Price
X - Quantity

Sloping up - Supply
Sloping down - Demand
Intersection - Equilibrium (label along the axis, not at the point)

What is equilibrium?

Point where supply and demand intersect
Quantity supplied = Quantity demanded

DO NOT SAY SUPPLY = DEMAND
YOU WILL BE WRONG AND SAD

What is the invisible hand of the market?

A completely free market will dictate that price settle @ equilibrium

Ceteris Paribus

Assume all other factors remain the same when doing supply/demand problems

DO NOT overanalyze (even if there’s a logical spillover effect)

What happens to Q_E and P_E when only demand increases?

Both Q_E and P_E increase

What happens to Q_E and P_E when only supply decreases?

Q_E decreases and P_E increases

What happens to Q_E and P_E when both supply and demand increase?

Q_E increases and P_E is indeterminate

What happens to Q_E and P_E when both supply increases and demand decreases?

Q_E is indeterminate and P_E decreases

What happens to Q_E and P_E when both supply increases and demand decreases?

Q_E is indeterminate and P_E decreases

Starbucks has to increase their salaries to match the binding price floor of labor (minimum wage). Also, people think that the price of coffee will increase soon for the holidays. What effect do these changes have to supply, demand, Q_E, and P_E?

Decrease supply, increase demand. Q_E is indeterminate and P_E increases.

The price of input increases (labor), so supply will decrease. Since consumers expect that price will increase, demand will increase.
Supply decreasing and demand increasing leads to Q_E is indeterminate and P_E increases.

What are binding/effective price controls?

Price ceiling/floor that takes the market out of equilibrium

What do binding price ceilings do to equilibrium? Supply? Demand?

Effective price ceilings set a max price for sellers to charge. This decreases price and results in a shortage (quantity demanded - quantity supplied)

Price controls DO NOT AFFECT SUPPLY OR DEMAND

What do effective price floors do to equilibrium? Supply? Demand?

Effective price floors set a min price for buyers to purchase. This increases price and results in a surplus (quantity supplied - quantity demanded)

Price controls DO NOT AFFECT SUPPLY OR DEMAND

What does a non binding price control do?

Nothing. It’s as useless as this study guide/flashcard set, because we all know that no matter how much we study or review we are going to forget all of it as soon as the test is handed out.

Also market settles at equilibrium.

What does an effective quota do?

It limits the quantity being supplied.

Quota rent

Demand price - Supply price at that quantity

Deadweight loss

Created when mutually beneficial transactions do not occur

Not in equilibrium

Issues with price ceilings (3)

Shortages
Producers lower quantity or quality to circumvent
Black markets emerge (price gouge consumers)

Types of consumer surplus (2)

Individual Surplus - difference between price and what the individual is willing to pay
Total Consumer Surplus - sum of individual surpluses in a market

If the price of a good decreases, what effects on consumer surplus are there? (2)

Greater surplus for existing customers
New customers surplus because more people will be willing to buy now

Graph consumer surplus

Above the price line

Graph producer surplus

Below the price line

If the price decreases from P₁ to P₂, what is A, B, and C?

A: initial consumer surplus
B: Additional consumer surplus from existing customers (note this region is the same quantity range as the initial! helps me remember)
C: New customer surplus (new quantity range! new customers)

An extra diagram to look at if this isn’t making sense.

You got this!!