Unit 2 AP Microeconomics

2.2 Demand

Demand - the quantities consumers are willing and able to buy at a certain price

Law of Demand - there is an inverse relationship between the price and quantity demanded of an item

The Substitution Effect - as the price of a good increases, the quantity demanded of that good lessens as consumers buy more of cheaper substitutes

The Income Effect - people buy more when they feel richer and less when they are poorer

The Law of Diminishing Marginal Utility - the more of a good you consume, the less marginal utility you receive each time

Shifts in Demand - left or right, never up or down

5 Shifters of Demand

  1. Tastes and preferences

  2. Number of Consumers

  3. Price of Related Goods

  4. Income

  5. Future Expectations of Price

Related Goods (2 Types)

  • Substitutes (positive)

  • Complements (negative)

Income

Normal Goods (+) = things you buy more of as income increases

Inferior Goods (-) = things you buy more of as income decreases

2.2 Supply

Supply - the quantity producers are willing and able to make at any given price

Law of Supply - there is a direct relationship between price and quantity demanded

5 Shifters of Supply

  1. Prices/Availability of Inputs/Resources

  2. Number of Producers

  3. Technology

  4. Government Action

  5. Expectations of future profit

2.3 Price Elasticity of Demand

Elasticity - how much more/less consumers buy based on price

PED- how sensitive QD is to a change in price

Inelastic Demand - QD changes a little due to price change (steep curve)

  1. Few substitutes

  2. Necessity

  3. Small % of income

  4. Needed now, not later

  5. EC < 1

Elastic Demand - QD changes a lot due to price change (flat curve)

  1. Many substitutes

  2. Luxury

  3. Large % of income

  4. Lots of time to decide

  5. EC > 1

ABSOLUTE VALUES ^

Elasticity Coefficient  - percent change in quantity demanded over percent change in price

Perfectly Inelastic - Vertical line. The demand doesn’t change based on price

Unit Elastic - elasticity coefficient 1

Total Revenue Test - Price*Qty. If the relationship is direct, it's inelastic. If its inverse, it's elastic.

2.4 Price Elasticity of Supply

PES - How sensitive quantity supplied is to a change in price

Aspects of Inelastic Supply

  • Hard to make

  • Hard to switch

OR

  1. Hard to produce

  2. High barriers to entry

  3. High cost/specialized inputs

  4. Hard to switch goods

  5. EC < 1

Aspects of Elastic Supply

  • Easy to make

  • Easy to switch

OR

  1. Easy to produce

  2. Low barriers to entry

  3. Low Cost

  4. Easy to switch goods

  5. EC < 1

 

2.5 Other Elasticities

XED - Cross Elasticity of Demand (How sensitive QD is to a change in price of another good)

  • %change Qx over %change y (SIGN MATTERS)

+ = substitute

- = complement

YED - Income Elasticity of Demand (How sensitive QD is to a change in income)

  • %change QD over %change income

+ = normal

- = inferior

2.6 Market Equilibrium & Producer Surplus

Disequilibrium - When the market is not at equilibrium (any pt besides equilibrium)

Shortage - When the price is below the market equilibrium price

  • Prices will increase to reach eq

  • QD > QS

Surplus - When the price is above the equilibrium price

  • Prices will decrease to reach eq

  • QS > QD

Consumer Surplus - The difference in how much consumers are willing to spend and how much they have to

Producer Surplus - the difference between how much producers are willing to sell and how much they sell at

Deadweight Loss - unused surplus as a result of taxes/other government action

2.7 Market Disequilibrium & Changes in Equilibrium

Practice graphing and results

Double Shifts - price or quantity will become indeterminate

2.8 The Effects of Government Intervention in Markets

Price Ceiling - The maximum price the government allows sellers to sell at (SHORTAGE)

Price Floor - The minimum price the government allows sellers to sell at (SURPLUS)

Excise Tax/Sin Tax - per unit tax on producers

  • taxing of goods to discourage usage (?)

Tax Revenue - how much the government makes through taxing

  • Qty (after tax) * Tax per unit

Total Expenditures - total $ spent

  • Qty * Price at equilibrium

Total revenue for firms

  • Total expenditure - tax revenue

2.9 International Trade and Public Policy

World Price - how much a good sells for on the world maker

Tariff - tax on import that increases world price

Quota - # limit on imports

Import - the goods a country takes in from world trade