fv0 - overview

AP Microeconomics Unit 2 Overview: Supply and Demand

Unit 2 Overview

  • Introduction to Microeconomics

    • First micro-specific unit in AP Microeconomics.

    • Focus on the fundamental model of microeconomics: Supply and Demand.

  • Understanding Markets

    • Definition: A market is a social structure connecting consumers (demanders) and producers (suppliers).

    • Mutual dependency: Consumers need producers to supply goods, and producers need consumers to buy them.

  • Key Concepts

    • Demand Curve: Represents consumer behavior regarding price changes.

    • Supply Curve: Represents producer behavior regarding price changes.

    • Market Equilibrium: The point where quantity demanded equals quantity supplied.

Unit 2.1: Demand

  • Law of Demand

    • As prices rise, quantity demanded declines.

    • Visual representation: Downward sloping demand curve.

  • Shifts in Demand

    • Events that change quantity demanded at every price point lead to shifts in the demand curve.

Unit 2.2: Supply

  • Law of Supply

    • As price increases, quantity supplied increases.

    • Visual representation: Upward sloping supply curve.

Unit 2.3: Price Elasticity of Demand

  • Understanding Elasticity

    • Measures sensitivity of quantity demanded to price changes.

    • Types:

      • Inelastic Demand: Quantity demanded is not very sensitive to price changes.

      • Elastic Demand: Quantity demanded is very sensitive to price changes.

Unit 2.4: Price Elasticity of Supply

  • Price Elasticity of Supply (PES)

    • Similar to PED but focuses on how quantity supplied responds to price changes.

    • Types: Inelastic and elastic supply.

Unit 2.5: Other Elasticities

  • Income Elasticity

    • Sensitivity of quantity demanded to changes in income.

    • Normal goods: Demand increases with income.

    • Inferior goods: Demand decreases with income.

  • Cross-Price Elasticity

    • Sensitivity of quantity demanded to changes in the price of related goods.

    • Positive: Substitutes.

    • Negative: Complements.

    • Zero: Unrelated goods.

Unit 2.6: Market Equilibrium and Surplus

  • Market Equilibrium

    • Achieved when quantity demanded equals quantity supplied.

    • Consumer Surplus: Extra benefit consumers receive when paying less than what they are willing to pay.

    • Producer Surplus: Extra benefit producers receive when selling for more than the minimum they are willing to accept.

Unit 2.7: Market Disequilibrium

  • Disequilibrium Scenarios

    • Excess Demand: Quantity demanded exceeds quantity supplied, leading to shortages.

    • Excess Supply: Quantity supplied exceeds quantity demanded, leading to surpluses.

  • Government Intervention

    • Price controls (ceilings and floors) can create market distortions.

    • Taxes (excise taxes) impact supply and demand dynamics.

Unit 2.8: Effects of Government Intervention

  • Price Controls

    • Price ceilings: Maximum price limits can lead to shortages.

    • Price floors: Minimum price limits can lead to surpluses.

  • Deadweight Loss

    • Economic inefficiency resulting from market distortions.

Unit 2.9: International Trade and Public Policy

  • Global Market Dynamics

    • World prices may differ from domestic equilibrium.

    • Tariffs and quotas protect domestic markets but can lead to deadweight loss.

Key Terms to Review

  • Allocative Efficiency: Resources distributed to maximize total benefit.

  • Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

  • Deadweight Loss: Loss of economic efficiency when equilibrium is not achieved.

  • Market Disequilibrium: When quantity demanded does not equal quantity supplied.

  • Tariffs and Quotas: Government-imposed limits affecting international trade.