determinants

AP Microeconomics Unit 2 – Supply and Demand

Overview

  • Unit 2 focuses on the fundamental concepts of supply and demand.

  • Understanding how supply and demand shift is crucial for analyzing markets.

Determinants of Demand (Mnemonic: TBPIE)

  • T - Tastes of Consumers

    • Demand shifts based on consumer preferences influenced by advertising and health warnings.

  • B - Buyers (Amount)

    • An increase in the number of buyers leads to higher demand; a decrease results in lower demand.

  • P - Price of Related Goods

    • Substitutes: If the price of a substitute falls, demand for that substitute increases (e.g., lower coffee prices increase coffee demand over tea).

    • Complements: If the price of a complement falls, demand for both the complement and the related good increases (e.g., lower peanut butter prices increase jelly demand).

  • I - Income

    • Normal Goods: Demand increases as consumer income rises (e.g., whole wheat pasta).

    • Inferior Goods: Demand decreases as consumer income rises (e.g., canned soup).

  • E - Expectations of Future Prices

    • If consumers expect future price increases, current demand rises (e.g., a sale on iPhones).

    • Conversely, if consumers expect future price drops, current demand decreases.

Determinants of Supply (Mnemonic: TPRENT)

  • T - Taxes and Subsidies

    • Higher taxes reduce supply as suppliers produce less to cover costs; lower taxes increase supply.

    • Higher subsidies encourage more production; lower subsidies decrease supply.

  • P - Prices of Related Products

    • If related product prices increase, supply of the current product decreases (e.g., tea producers may switch to coffee if coffee prices rise).

    • If related product prices decrease, supply of the current product increases.

  • R - Resources (Price)

    • Increased resource prices (e.g., wheat) decrease supply; decreased resource prices increase supply.

  • E - Expectations of Sellers

    • If sellers expect future price increases, current supply decreases; if they expect price drops, current supply increases.

  • N - Number of Sellers

    • More sellers in a market increase supply; fewer sellers decrease supply.

  • T - Technology

    • Improved technology increases supply; technological failures decrease supply.

Key Takeaways

  • Supply and demand can shift due to non-price determinants.

  • Price changes affect the quantity supplied and demanded but do not shift the supply and demand curves.

  • Remembering the mnemonics TBPIE and TPRENT can help in recalling the determinants of supply